Objectives and method of credit control
The current financial system is a credit economy. Credit has assumed an increasingly wide significance in sustaining the base of the modern economic system. It is the blood line of current business. For that reason credit control is necessary for steadiness and methodical development of an economy.
Objectives of Credit Control
A central bank controls credit with the following objects in view:—
(a) To safeguard its gold reserves against internal and external drains;
(b) To maintain stability of internal prices;
(c) To achieve stability of foreign exchanges;
(d) To eliminate fluctuations in output and employment;
(e) To achieve full employment of resources of the economy;
(f) To assist in economic growth. This assistance is required not only in underdeveloped countries desirous of accelerating economic development but also in developed countries desirous of maintaining and improving their living standards.
Methods of Credit Control
Now we proceed to discuss the methods of credit control, also called the central banking techniques.
There are broadly speaking two methods of Credit controls utilized by the Reserve banks in recent times for checking bank loans:
(a) Quantitative or General Controls; and
(b) Qualitative Controls or the Selective Credit Controls.
The object of the quantitative controls is to control the sum of bank loans, i.e., to control the lending or borrowing activities of the banks. The object of the selective credit controls is to divert bank advances into certain channels or to discourage them from lending for certain purposes. These selective controls have of late assumed great importance, especially in underdeveloped economies.
The following are the main methods of credit control used by the central banks in modern times.
Quantitative or General Controls
(i) Manipulation of the bank rate;
(ii) Open market operations;
(iii) Varying reserve requirements;
(iv) Credit rationing.
Qualitative or Selective Controls
(v) Varying margin requirements for certain bank advances;
(vi) Regulation of consumer credit for regulating volume of installment credit buying; and
(vii) Issuing directives to restrict bank advances.
All these methods of credit control helps in controlling bank advances thereby ensuring a steady and smooth growth of the economic condition of the nation.