INTRODUCTION

According to MH Decock, A central bank is the apex banking and monetary authority and which also serves in the best national economic interest. The most important function or responsibility of a central bank is to control credit. Methods of credit control: 1) Quantitative or general methods 2) Qualitative or selective methods

QUALITATIVE METHODS OF CREDIT CONTROL

Qualitative methods of credit control are those which regulate the flow and direction of credit in certain selective sections of society. They have been explained as under: 1) Margin Requirement : Market Value of asset Value of loan Some traders often indulge in speculative activities by hoarding goods and services and creating artificial shortage of goods. This is done with loans taken from commercial banks. To curb this, the central bank instructs the commercial banks to raise their margin and reduce the loan amount given to traders. This prevents the traders from indulging in speculative activities and inflation is curbed.

2) Regulation of Consumer credit: People often take loans from commercial banks for purchase of consumer durables. When demand for such goods exceeds supply the central bank instructs the commercial banks to increase the down payment on such loans and also reduce the time period for repayment of the loans through instalments. This discourages buyers and their demand their demand falls. Thus, demand = supply and the price of the commodity is stabilized.

3) Credit Rationing: The central bank orders the commercial banks to provide loans only for essential purposes and not for non-essential purposes. 4) Moral Suasion: In order to control inflation, the central bank politely appeals to all the commercial banks to provide lesser loans at a higher rate of interest. 5) Control through directives: The central bank also issues strict warnings to commercial banks to provide lesser loans at a higher rate of interest through letters and meetings. This in turn would help to control inflation.

6) Direct action: When all else fails, the central bank gives an ultimatum to the commercial banks by refusing to rediscount bills of exchange, refusing to lend and also threatens to shut down the banks as a last resort, if they disobey the central banks instructions. 7) Publicity: In order to create awareness and enlighten public about the central banks efforts to curb inflation, they publish reports in all major newspapers, journals, annual reports etc.

QUANTITATIVE METHODS OF CREDIT CONTROL

Quantitative methods of credit control are those methods which regulate the volume of credit in the entire economy. The following are the quantitative methods of credit control: 1) Bank Rate policy: Bank rate is the rate of interest charged by the Central bank to the commercial bank when the commercial bank rediscounts bills of exchange with the central bank. When there is inflation Central bank raises the rate of interest charged to the commercial banks commercial banks discouraged in turn charge a higher rate of interest to the traders who in turn get discouraged and disinvest their funds. Thus, no new factories no jobs- no income no purchasing power no demand-traders get discouraged as there is no demand and thus lower the prices to raise the demand, thus demand rises and inflation is cured.

2) Open Market Operation: Open market operation is the buying and selling of securities by the central bank. When there is inflation, the central bank starts selling securities compulsorily to the commercial banks the public also start buying securities for their own benefit thus, the central bank raises the rate of interest charged to commercial banks banks discouraged and charge higher rate of interest and provide lesser loans to traders they get discouraged and hence inflation is cured. 3) Cash Reserve Ratio: CRR is the amount the commercial banks are require to deposit with the central bank compulsorily in the form of cash, gold and securities. Usually. The CRR is anywhere between 315%. When there is inflation, the government (RBI) raises the CRR rate. Thus a lesser amount of money is left with the commercial banks for giving out loans. Thus they are discouraged and give out a lesser amount of loans that too at a higher rate of interest to the traders traders discouraged hence, inflation is cured.

4) Statutory Liquidity Ratio: In addition to the CRR, every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR). An increase in SLR will restrict the banks leverage position to pump more money into the economy. In addition to the CRR, the commercial banks have to deposit SLR up to 25% with the central bank. When there is inflation, the government raises the rate of SLR. Thus, less money is available with the banks they are discouraged, give lesser loans at a higher rate of interest to traders traders get discouraged cycle continues inflation cured.

DISTINCTION BETWEEN QUANTITATIVE AND QUALITATIVE METHODS OF CREDIT CONTROL

QUANTITATIVE METHODS
Methods which regulate the volume of credit in the entire economy. Non discriminatory in nature.

QUALITATIVE METHODS
Methods which regulate the flow and direction of credit in certain selective sections of the society. Discriminatory in nature.

Types of quantitative methods: Bank rate policy Open market operations Cash reserve ratio CRR Statutory Liquidity Ratio - SLR

Affect the entire economy. Also called General methods of credit control.

Types of qualitative methods: Margin requirement Regulation of consumer credit Moral suasion Credit rationing Control through directives Direct action Publicity Affect traders and consumers only. Also called selective methods of credit control.