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    credit control

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    minatipaul207
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    2 views3 pages

    credit control

    Uploaded by

    minatipaul207
    Credit

    Copyright:

    © All Rights Reserved
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    of 3

    ​Methods of Credit Control

    There are basically two methods of controlling the credit. They are
    Qualitative and the Quantitative or the General Methods.

    Qualitative Method
    Marginal Requirement Fixation- The central bank establishes the
    margin that financial institutions and commercial banks must keep
    for amounts provided in the form of loans against commodities,
    stocks, and shares using this method. To prevent speculative
    trading on stock exchanges, the central bank sets margin
    restrictions for the underlying securities.

    Credit Rationing- The central bank uses this strategy to try to limit
    the maximum amount of loans and advances to a specific sector.
    Furthermore, the central bank may set a ceiling for different types
    of loans and advances in specific instances. This restriction is also
    expected to be adhered to by commercial banks. This makes it
    easier to reduce bank lending exposure to undesirable industries.

    Regulation of the consumer credit– The apex bank establishes the


    down payments and the length of time over which installments are
    to be spread in order to regulate consumer credit. Higher
    limitations are imposed during inflation to control prices by
    reducing demand, whereas relaxations are offered during
    depression to promote demand for commodities.

    Control through the directives- The central bank uses this strategy
    to issue regular directives to the commercial banks. Commercial
    banks are guided by these directives in developing their lending
    policies. The central bank can use a directive to alter credit
    structures and limit credit supply for a specified purpose. The
    Reserve Bank of India (RBI) issues guidelines to commercial banks
    prohibiting them from lending money to the speculative sector,
    such as securities, in excess of a specified amount.
    Publicity- Another way of selective credits control.. The Reserve
    Bank of India (RBI) uses it to issue various reports on what is
    excellent and poor in the system. The publicly available
    information can assist commercial banks in targeting credit supply
    to specific industries.

    The Moral Suasion- It refers to the Reserve Bank of India (RBI)


    exerting pressure on the banking system of India without taking
    any serious action to ensure compliance with the laws. It’s a
    recommendation to the banks and aids in the restraint of lending
    during periods of high inflation. Monetary policy keeps commercial
    banks informed about the central bank’s expectations. Central
    banks may offer directions, recommendations, and suggestions to
    commercial banks to reduce loan supply for the speculative motive
    under moral suasion.

    Direct Actions-The RBI has the power to take actions against a


    banks using this way. Second, the RBI has the authority to refuse
    credit to bank whose borrowings exceed their capital. By adjusting
    some rates, the central banks can penalize a bank. Finally, it has the
    authority to impose a prohibition on specific banks if they fail to
    obey its instructions and works against the monetary policy’s goals.

    Quantitative Methods
    Bank Rate Policy- The bank rate is the lowest rate at which a
    country’s central bank will lend money to its commercial bank and
    RBI utilizes it to regulate the credit in the economy. Because the
    central bank provides funding to the commercial banks by
    rediscounting bills, it is also known as the discount rate.

    Open Market operations- The RBI’s purchase and the sale of


    securities are referred to as OMO. In an inflationary scenario, for
    example, the RBI will begin selling government securities, which
    will reduce money supply in the system (because the buyer of the
    securities will pay in Rupee, thus currency from the system will go
    out). The decline in money supply will lead to a reduction in funds
    with commercial banks, which will further minimize their lending
    capability. As a result of the decrease in lending, credit in the
    economy is reduced. However, it is limited by a number of factors,
    including an underdeveloped securities market, surplus reserves
    held by commercial banks, commercial bank debts, and so on.

    Variation in the Reserve Ratio– The commercial banks are required


    by the RBI to keep a certain percentage of their net demand and
    time obligations in Cash Reserves. Banks must also keep a specified
    amount of their net demand and time obligations in the form of
    liquid assets. The Cash Reserve Ratio (CRR) and the Statutory
    Liquidity Ratio (SLR) are the two reserve ratios. The reserve
    position of commercial banks, which regulates the availability of
    money in the economy, can be affected by even little changes in
    these ratios.

    Repurchase Option- The central bank conducts repo transactions,


    also known as repurchase transactions, to manage the cash market
    situation. The Central Bank grants commercial banks loans against
    government-approved securities for a set length of time at a fixed
    rate, known as the Repo Rate, on the premise that the borrowing
    bank will repurchase the securities at the established rate once the
    period is up. The central bank conducts these transactions in order
    to drain or drain money from the system.

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