This document provides an overview of the methods used by central banks to control credit in the economy. It discusses two main types of credit control methods: quantitative and qualitative. Quantitative methods like bank rate policy and open market operations aim to control the overall supply of credit indiscriminately. Qualitative or selective methods target specific sectors or uses of credit to distinguish essential vs non-essential lending. Examples given include regulating margins for stock market loans, consumer credit terms, and directly rationing or restricting certain types of lending. The goal of these credit control methods is to influence monetary conditions and support the central bank's economic objectives.

1. Central banking – methods of credit
control – an overview
Ansal.P
ansalmuhammedp@gmail.com

2. Central bank – quick recap
• They are different from commercial banks
• It does not aim at profit – although it may actually earn
good amount of profit
• It aims at controlling the banking system and supporting
the economic policy of the government
• It is empowered with special powers to control and
regulate the working of the commercial banking systems
of the country
• It is rather popularly known for its action to control credit
in the economy

3. Two methods of credit control
1. Quantitative credit control methods
1. Bank rate or discount policy
2. Open market operation & reserve requirements
2. Qualitative or selective credit control methods
1. Regulations or margin requirements
2. Regulation of consumer credit
3. Control through directives
4. Moral suasion
5. Rationing of credit
6. Direct action

4. Quantitative methods
• Bank Rate Policy
– Commercial banks when in additional need of cash – obtain from
the Central Bank either
• By rediscounting some of the securities; or
• Borrow from the Central Bank against the securities
• For this Central Bank charges interest at the rate, which
is known as Bank Rate or Discount Rate

5. BANK RATE GOVING UP
• LENDING RATES
OF THE
COMMERCIAL
BANKS WILL GO
UP
• PEOPLE ARE
DISCOURAGED
TO TAKE LOANS
• MERCHANTS
LIQUIDATE THEIR
STOCKS
• DEALERS IN
STOCK
EXCHANGE MAY
LIQUIDATE THEIR
STOCKS TO PAY
OFF THEIR LOANS
BANK RATE GOVING DOWN
• LENDING RATES
GO DOWN
• PEOPLARE ARE
ENCOURAGED TO
TAKE LOANS
• MERCHANTS
HOLD THE
STOCKS
• STOCK’S WILL BE
HELD ON TO BY
THE BROKERS
• MORE PURCHASE
OF STOCKS WILL
ALSO TAKE PLACE

6. Quantitative methods
• Open Market Operations
– Deliberate and direct buying and selling of securities and bills in
the money market by the Central Bank on its own initiative

7. Quantitative methods
• Reserve Ratio Requirements
• The requirement of a commercial bank to maintain a
minimum percentage of their time and demand liabilities
with the Central Bank also know as ‘Cash Reserve Ratio’
• The objective
– To ensure liquidity & solvency among the banks
– To provide Central Bank with supply of deposits for its local
operations
– To influence ultimately restrict commercial banks’ extension of
credit

8. Selective credit control methods
• Unlike the quantitative controls – they are not
indiscriminately impact across all sectors
• Historically – these were designed and applied during
the World War II period
• Advantages
– They distinguish between essential and non essential uses of
the Bank credit
– Only non essential uses are brought under the scope of Central
Bank controls; and
– They affect not only lenders but borrowers as well

9. Selective credit control methods
• Margin requirements
– The stock-market crash of 1929 in USA
– There was extensive speculation in stock markets in US
– The Federal Reserve Bank of America ordered commercial
banks to restrict their loans and advances to stock brokers by
raising the margin requirements

10. Regulation of customer credit
• The restraint under these regulations were two fold
– They limited the amount of credit for the purchase of any article
listed in the regulation; and
– They limit the time for repaying the debt

11. Moral suasion
• Implies persuasion and request made by the Central
Bank to the commercial banks to follow the general
monetary policy of the former

12. Rationing of credit
• Method of controlling and regulating the purpose for
which credit is granted by the commercial banks

13. Direct action
• in 1959 – RBI directed the entire banking system to
refrain from excessive lending