Explain each qualitative credit control tools of RBI?

Answer 1

Central bank uses credit rationing to fix the credit ceiling allowed for each and every commercial bank. It means that central bank fixes the credit limit for each commercial bank and does not give credit to them beyond that limit. Whenever the central bank desires to decrease the money supply it decreases the limit up to which it can give loans to the member banks. Similarly central bank can increase the money supply by increasing the credit limit.

Every commercial bank has to keep a margin whenever it extends loans against the security. It means that the amount of loan is lower than the actual value of security. For example actual value of security is 100 and the amount of loan is 85, therefore margin requirement is 15%. Central bank can increase or decrease the money supply by changing the margin requirements. For example if central bank wants to decrease the money supply it can do so by increasing the margin requirements. In this way amount of loans decreases.

Consumer creditfacility refers to the act of selling a consumer good on a credit basis to the people. The method is used by government or central bank to implement certain regulations on goods sold on credit. If the central bank wants to increase the money supply it can do so by adopting a lenient policy about the credit for purchase of consumer goods. Similarly central bank can reduce the money supply by putting restrictions on consumer credit.

In some cases central bank morally persuades or requests the commercial banks not to indulge themselves in such economic activities which are against the interest of country. It regularly advises and guides the member banks to follow a particular policy for loans and refrain themselves from giving loan for speculative purposes.

Central bank also publishes details concerning its policies and important information about assets and liabilities, credit and business situation etc of commercial banks. This helps to make commercial banks as well as general public realize the monetary needs of country. Central bank reveals some of the important information about the commercial banks so that the people know about the various activities of commercial banks and can protect themselves from any potential loss in the future.

Direct action is the last resort through which central bank takes a direct action against the bank which does not act in accordance with the policy of central bank. In case of direct action the central bank can impose fine and penalty and can refuse to give out loans to the commercial bank. Such type of pressure keeps commercial banks away from undesired credit activities.