Credit control methods of central bank. The Methods of Credit Control Essay 2019-02-13

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Methods of Credit Control by Central Bank

credit control methods of central bank

The bicycle industry would expand along with the related industries such as tyres, tubes, spare parts, etc. Similarly, this rate is also used to stabilize Ex­change Rate of Rupee. Their objective is mainly to control and regulate the flow of credit into particular industries or businesses. This condition is very essential for open market operations because without a well developed security market the central bank will not be able to buy and sell securities on a large scale, and thereby influence the reserves of the commercial banks. On the contrary, if the central bank wants to expand credit, it lowers the reserve ratio so as to increase the credit creation power of the commercial banks. When the banks and the private individuals purchase these securities they have to make payments for these securities to the Central Bank. The prices of fixed interest bearing securities tend to register a decline because the interest rate ruling in the market would be higher than the rate originally fixed on such securities.

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Methods of credit control employed by the central bank

credit control methods of central bank

The method of control involves the following steps. Wages, Costs and Prices not Elastic: The success of the bank rate policy requires elasticity not only in interest rates but also in wages, costs and prices. The importance of the bank rate lies in the fact that it acts as pace-setter to the other market rates of interest, both short-run and long-run, and that its variation affects both cost and availability of bank credit. The result will be an unfavorable balance for payment. It increases during periods of brisk business activity and decreases in periods of falling prices. The second method is known as the variable capital assets ratio.

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Methods of Credit Control used by Central Bank

credit control methods of central bank

Qualitative or selective credit control policy refers to the set of policies implemented by the central bank in order to channelize the available credit in-the desired direction. The most important function of the Central Bank is to control credit. Rationing of Credit It is necessary for every commercial bank to approach the central bank to improve its liquidity in times of need. The central bank fixes minimum margin requirements on loans for purchasing securities. So the total cash with banks remains Rs 900 crores and loans are also reduced by the same percentage, that is, to Rs 810 crores. . If you want to learn more about credit Control kindly.

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Credit control by_central_bank

credit control methods of central bank

Venugopal Redd … y - September 6 th 2003 to September 5 th 2008 b. It results in decline in value of goods over a period of time. In this situation, the scale of securities by the central bank to restrict monetary expansion will be unsuccessful. Open Market Operations : Open market operations are another method of quantitative credit control used by a central bank. The cash balance of the bank in question which it keeps with the central bank is to that extent reduced with the reduction of its cash the commercial bank has to reduce its landing. Despite these limitations, open market operations are more effective than the other instruments of credit control available with the central bank.

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LEARN ABOUT COMMERCE: How central bank control credit in the country?

credit control methods of central bank

Bills of Exchange not used: As a corollary to the above, the effectiveness of the bank rate policy depends on the existence of eligible bills of exchange. Changes in the Marginal Requirements on Security Loans: This system is mostly followed in U. There is contraction of credit which depresses the rise in price. Bank rate changes affect the capital values of the assets of business firms, and consequently, their balance sheets and their ability to lend. Thus this instrument of credit control cannot be operative in countries which lack such a market.

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Qualitative Method of Credit Control in Central Bank

credit control methods of central bank

Require Large Staff: The commercial banks, for the purpose of earning large profits, may advance loans for purposes other than laid down by the central bank. However, the rate is drastically reduced in recent times. This would in turn help the world economy stabilize after the beating it has taken because of this crisis. It is a very effective anti-inflationary device because it controls the expansion of credit in those sectors of the economy which breed inflation. Methods of Selective Credit Control The Central Bank uses the following qualitative methods to control the credit in the economy: 1.


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Credit Control By RBI / Central Bank

credit control methods of central bank

It includes the advice, suggestion request and persuasion with the commercial banks to co-operate with the Central Bank. Borrowing from the central bank becomes cheap and easy. The central bank uses the weapon to overcome seasonal stringency in funds during the slack season. Furthermore, these opera­tions cannot be carried out effectively in the absence of a broad and well- developed market for government securities. They therefore, embody the view that the monopoly of credit should in fact become a discriminating monopoly.

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4 Qualitative Methods of Credit Control Used by the Reserve Bank

credit control methods of central bank

On the other hand, a fall in the bank rate lowers the market rates, and the value of capital assets increases. When the banks keep excessive reserves, an increase in the reserve ratio will not affect their lending operations. They will continue to expand credit irrespective of the rise in the bank rate. Banks do not approach Central Bank: The effectiveness of the bank rate policy as a tool of credit control is also limited by the behaviour of the commercial banks. Determination of bank credit policy: other things are considered at the time of deciding credit policies by the commercial banks.

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Credit Control Methods of RBI: Explained

credit control methods of central bank

The instructions may be in the form of oral or written statements or appeals or warnings. This leads to contraction of credit in the economy. The success of this method depends upon the co-operation between the Central Bank and Com­mercial Banks and the respect the Central Bank commands from other banks. It makes the commercial bank flexible in time of credit supply. They are, in fact, the percentage of the value of the security that cannot be borrowed or lent. It presupposes the existence of an educated and knowledgeable public about the monetary phenomena.

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The Methods of Credit Control Essay

credit control methods of central bank

So if the central bank hikes the repo rate, the banks will automatically hike their lending rates. The executive head of the central bank calls a meeting of the heads of the commercial banks wherein he explains them the need for the adoption of a particular monetary policy in the context of the current economic situation, and then appeals to them to follow it. Though this method has the legal sanction, central banks around the globe rarely apply this method. But the success of this technique requires that there are no leakages of bank credit for non-purpose loans to speculators. Overview of credit policy Why should you take up bank and trade references? Al­though qualitative in character, they are yet treated as minor ones. When the bank rate changes, it brings changes in the market rates of interest, thereby inducing a change in the incentive of investment expenditures of business firms.

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