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The central bank makes efforts to control the expansion or contraction of credit in order to keep it at the required level with a view to achieving the following ends.
1. To save Gold Reserves: The central bank adopts various measures of credit control to safe guard the gold reserves against internal and external drains.
2. To achieve stability in the Price level: Frequently changes in prices adversely affect the economy. Inflationary and deflationary trends need to be prevented. This can be achieved by adopting a judicious of credit control.
3. To achieve stability in the Foreign Exchange Rate: Another objective of credit control is to achieve the stability of foreign exchange rate. If the foreign exchange rate is stabilized, it indicates the stable economic conditions of the country.
4. To meet Business Needs: According to Burgess, one of the important objectives of credit control is the "Adjustment of the volume of credit to the volume of Business" credit is needed to meet the requirements of trade an industry. So by controlling credit central bank can meet the requirements of business.
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Define Credit control by central bank?
Credit Control by a central bank is an activity by which the central bank of the nation controls the availability of credit facilities to its citizens. Relaxed laws mean that loans are available easily and cheaply whereas tight credit laws mean that loans are not available easily. They are both difficult and costly. Mostly central banks relax credit laws in times of economic downtimes to encourage borrowing and to increase cash flow.
What is the role of central bank?
The role of the central bank is to control all local banks in a country.
What are the ways the central bank can control the activities of the commercial bank?
explain four ways in which the central bank esercises control over commercial banks
What is credit control by central bank?
(a) Bank Rate: It is the rate at which central bank discounts the securities of commercial banks or advance loans to commercial banks. This rate is the minimum and it affects both cost and availability of credit. Bank rate is different from market rate. Market rate is the rate of discount prevailing in the money market among other lending institutions. Generally bank rate is higher than the market rate. If the bank rate is changed all the other rates normally change at the same direction. A central bank control credit by manipulating the bank rate. If the central bank raise the bank rate to control credit, the market discount rate and other lending rates in the money will go up. The cost of credit goes up and demand for credit goes down. As a result, the volume of bank loans and advances is curtailed. Thus raise in bank rate will contract credit.(b) Open Market Operation: It refers to buying and selling of Government securities by the central bank in the open market. this method of credit control become very popular after the 1st World War. During inflation, the bank will securities and during depression, it will purchase securities from the public and financial institutions. The RBI is empowered to buy and sell government securities from the public and financial institutions. The RBI is empowered to buy and sell government securities, treasury bills and other approved securities. The central bank uses the weapon to overcome seasonal stringency in funds during the slack season.When the central bank sells securities, they are purchased by the commercial banks and private individuals. So money supply is reduced in the economy and there is contraction in credit.When the securities are purchased by the central bank, money goes to the commercial banks and the customers. SO money supply is increased in the economy and there is more demand for credit.Thus open market operation is one of the superior instrument of credit control. But for achieving an ideal result both Bank Rate and Open Market Operation must be used simultaneously.(c) Variable Reserve Ratio (VRR): This is a new method of credit control adopted by central bank. Commercial banks keep cash reserves with the central bank to maintain for the purpose of liquidity and also to provide the means for credit control. The cash reserve is also called minimum legal reserve requirement. The percentage of this ratio can be changed legally by the central bank. The credit creation of commercial banks depends on the value of cash reserves. If the value of reserve ratio increase and other things remain constant, the power of credit creation by the commercial bank is decreased and vice versa. Thus by varying the reserve ratio, the lending capacity of commercial banks can be affected.(B) Qualitative or Selective Control Method:It is also known as qualitative credit control. This method is used to control the flow of credit to particular sectors of the economy. The direction of credit is regulated by the central bank. This method is used as a complementary to quantitative credit control discourage the flow of credit to unproductive sectors and speculative activities and also to attain price stability. The main instruments used for this purpose are:(1) Varying margin requirements for certain bank: While lending commercial banks accept securities, deduct a certain margin from the market value of the security. This margin is fixed by the central bank and adjust according to the requirements. This method affect the demand for credit rather than the quantity and cost of credit. This method is very effective to control supply of credit for speculative dealing in the stock exchange market. It also helps for checking inflation when the margin is raised. If the margin is fixed as 30%, the commercial banks can lend up to 70% of the market value of security. This method has been used by RBI since 1956 with suitable modifications from time to time as per the demand and supply of commodities.(2) Regulation of consumer's credit: Apart from trade and industry a great amount of credit is given to the consumers for purchasing durable goods also. RBI seeks to control such credit in the following ways:(a) by regulating the minimum down payments on specific goods.(b) by fixing the coverage of selective consumers durable goods.(c) by regulating the maximum maturities on all installment credit and(d) by fixing exemption costs of installment purchase of specific goods.(3) Control through Directives: Under this system, the central bank can issue directives for the credit control. There may be a written or oral voluntary agreement between the central bank and commercial banks in this regard. Sometimes the commercial banks do not follow these directives of the RBI.(4) Rationing of credit: The amount of credit to be granted is fixed by the central bank. Credit is rationed by limiting the amount available to each commercial bank. The RBI can also restrict the discounting of bills. Credit can also be rationed by the fixation of ceiling for loans and advances.(5) Direct Action: It is an extreme step taken by the RBI. It involves refusal by RBI to extend credit facilities, denial of permission to open new branches etc. RBI also gives wide publicity about the erring banks to create awareness amongst the public.(6) Moral suasion: RBI uses persuasion to influence lending activities of banks. It sends letters to banks periodically, advising them to follow sound principles of banking. Discussions are held by the RBI with banks to control the flow of credit to the desired sectors.
Objectives of rural banks?
they will identify the credit needs of each region to regulate productivity and avoid wastefulness. the banks will help eradication of poverty and eliminate the financial constraints that mark the progress of poor farmers and artisans.
What has the author Plamen Yossifov written?
Plamen Yossifov has written: 'The use of credit ceilings in the presence of indirect monetary instruments' -- subject(s): Bank profits, Banks and banking, Central, Central Banks and banking, Credit control, Econometric models, Money supply
Define Credit control by central bank?
Credit Control by a central bank is an activity by which the central bank of the nation controls the availability of credit facilities to its citizens. Relaxed laws mean that loans are available easily and cheaply whereas tight credit laws mean that loans are not available easily. They are both difficult and costly. Mostly central banks relax credit laws in times of economic downtimes to encourage borrowing and to increase cash flow.
How does the central banks control the interest rate?
Central banks control interest rates by altering the repo rate. Repo rate is the rate at which banks borrow money from the central bank. So if the central bank hikes the repo rate, the banks will automatically hike their lending rates. similarly if the central bank reduces the repo rate, banks will lower their lending rates too.
How does the central banks control the interest rates?
Central banks control interest rates by altering the repo rate. Repo rate is the rate at which banks borrow money from the central bank. So if the central bank hikes the repo rate, the banks will automatically hike their lending rates. similarly if the central bank reduces the repo rate, banks will lower their lending rates too.
What is the role of central bank?
The role of the central bank is to control all local banks in a country.
What are the ways the central bank can control the activities of the commercial bank?
explain four ways in which the central bank esercises control over commercial banks
What is credit control by central bank?
(a) Bank Rate: It is the rate at which central bank discounts the securities of commercial banks or advance loans to commercial banks. This rate is the minimum and it affects both cost and availability of credit. Bank rate is different from market rate. Market rate is the rate of discount prevailing in the money market among other lending institutions. Generally bank rate is higher than the market rate. If the bank rate is changed all the other rates normally change at the same direction. A central bank control credit by manipulating the bank rate. If the central bank raise the bank rate to control credit, the market discount rate and other lending rates in the money will go up. The cost of credit goes up and demand for credit goes down. As a result, the volume of bank loans and advances is curtailed. Thus raise in bank rate will contract credit.(b) Open Market Operation: It refers to buying and selling of Government securities by the central bank in the open market. this method of credit control become very popular after the 1st World War. During inflation, the bank will securities and during depression, it will purchase securities from the public and financial institutions. The RBI is empowered to buy and sell government securities from the public and financial institutions. The RBI is empowered to buy and sell government securities, treasury bills and other approved securities. The central bank uses the weapon to overcome seasonal stringency in funds during the slack season.When the central bank sells securities, they are purchased by the commercial banks and private individuals. So money supply is reduced in the economy and there is contraction in credit.When the securities are purchased by the central bank, money goes to the commercial banks and the customers. SO money supply is increased in the economy and there is more demand for credit.Thus open market operation is one of the superior instrument of credit control. But for achieving an ideal result both Bank Rate and Open Market Operation must be used simultaneously.(c) Variable Reserve Ratio (VRR): This is a new method of credit control adopted by central bank. Commercial banks keep cash reserves with the central bank to maintain for the purpose of liquidity and also to provide the means for credit control. The cash reserve is also called minimum legal reserve requirement. The percentage of this ratio can be changed legally by the central bank. The credit creation of commercial banks depends on the value of cash reserves. If the value of reserve ratio increase and other things remain constant, the power of credit creation by the commercial bank is decreased and vice versa. Thus by varying the reserve ratio, the lending capacity of commercial banks can be affected.(B) Qualitative or Selective Control Method:It is also known as qualitative credit control. This method is used to control the flow of credit to particular sectors of the economy. The direction of credit is regulated by the central bank. This method is used as a complementary to quantitative credit control discourage the flow of credit to unproductive sectors and speculative activities and also to attain price stability. The main instruments used for this purpose are:(1) Varying margin requirements for certain bank: While lending commercial banks accept securities, deduct a certain margin from the market value of the security. This margin is fixed by the central bank and adjust according to the requirements. This method affect the demand for credit rather than the quantity and cost of credit. This method is very effective to control supply of credit for speculative dealing in the stock exchange market. It also helps for checking inflation when the margin is raised. If the margin is fixed as 30%, the commercial banks can lend up to 70% of the market value of security. This method has been used by RBI since 1956 with suitable modifications from time to time as per the demand and supply of commodities.(2) Regulation of consumer's credit: Apart from trade and industry a great amount of credit is given to the consumers for purchasing durable goods also. RBI seeks to control such credit in the following ways:(a) by regulating the minimum down payments on specific goods.(b) by fixing the coverage of selective consumers durable goods.(c) by regulating the maximum maturities on all installment credit and(d) by fixing exemption costs of installment purchase of specific goods.(3) Control through Directives: Under this system, the central bank can issue directives for the credit control. There may be a written or oral voluntary agreement between the central bank and commercial banks in this regard. Sometimes the commercial banks do not follow these directives of the RBI.(4) Rationing of credit: The amount of credit to be granted is fixed by the central bank. Credit is rationed by limiting the amount available to each commercial bank. The RBI can also restrict the discounting of bills. Credit can also be rationed by the fixation of ceiling for loans and advances.(5) Direct Action: It is an extreme step taken by the RBI. It involves refusal by RBI to extend credit facilities, denial of permission to open new branches etc. RBI also gives wide publicity about the erring banks to create awareness amongst the public.(6) Moral suasion: RBI uses persuasion to influence lending activities of banks. It sends letters to banks periodically, advising them to follow sound principles of banking. Discussions are held by the RBI with banks to control the flow of credit to the desired sectors.
What place national banks under the control of a central authority?
Federal Reserve Act
Which among the following measure of controlling inflation can be taken up byReserve Bank of India and not by Government of India?
I).Monetary Measures The most important and commonly used method to control inflation is monetary policy of the Central Bank. Most central banks use high interest rates as the traditional way to fight or prevent inflation. Monetary measures used to control inflation include: (i) bank rate policy (ii) cash reserve ratio and (iii) open market operations. Bank rate policy is used as the main instrument of monetary control during the period of inflation. When the central bank raises the bank rate, it is said to have adopted a dear money policy. The increase in bank rate increases the cost of borrowing which reduces commercial banks borrowing from the central bank. Consequently, the flow of money from the commercial banks to the public gets reduced. Therefore, inflation is controlled to the extent it is caused by the bank credit. Cash Reserve Ratio (CRR) : To control inflation, the central bank raises the CRR which reduces the lending capacity of the commercial banks. Consequently, flow of money from commercial banks to public decreases. In the process, it halts the rise in prices to the extent it is caused by banks credits to the public. Open Market Operations: Open market operations refer to sale and purchase of government securities and bonds by the central bank. To control inflation, central bank sells the government securities to the public through the banks. This results in transfer of a part of bank deposits to central bank account and reduces credit creation capacity of the commercial banks
How do central bank control the quantity of money in circulation?
Central banks control the quantity of money in circulation by printing more bills when the central storage is low and refraining from printing when the country is suffering from inflation.
Why do central banks playing important role in the global economy?
Central banks control the foreign currency reserves that are used for international trade.They also set each country's monetary policies.
Objectives of rural banks?
they will identify the credit needs of each region to regulate productivity and avoid wastefulness. the banks will help eradication of poverty and eliminate the financial constraints that mark the progress of poor farmers and artisans.
