Objectives and Methods of Credit Control
Objectives and methods of Credit Control
The current market is a credit economy. Credit has assumed a more and more broad importance in supporting the bottom of the current economic structure. It is the life line of current trade and commerce. For that reason, control of credit is important for constancy 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 deve¬lopment 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 types of controls used by the central banks in modern times for regulating bank advances:
(a) Quantitative or General Controls; and
(b) Qualitative Controls or the Selective Credit Controls.
The intend of the quantitative controls is to control the quantity of bank advances, such as to make the commercial banks loan more or less as according to the economic scenario. 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 econo¬mies.
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.
Basically these are the methods of credit control or central banking techniques in modern times to regulate bank advances.