Quantitative credit control and its limitations
The control of credit is widely recognized as the main function of a central bank. It is a function which embraces the most important questions of central banking policy. In fact, the heart of monetary policy lies in credit control, i.e., monetary management.
However, there are serious difficulties in the way of achieving control over credit. In the first place, there are difficulties in the way of controlling credit itself. Secondly, even if the bank is able to control the volume of credit, the objectives concerned may not necessarily be achieved. Several difficulties in the way of controlling credit may be noted.
limitations of Quantitative credit control
First, bank credit is not the only form of credit. There is commercial credit like book credit, bills of exchange and promissory notes (not discounted by banks). Over these the central bank has little control. They are as much purchasing power as any other form of credit.
Secondly, even as regards bank credit, all banks of the country do not have direct relations with the central bank. In the U.S.A., for instance one-half of the commercial banks with one-fifth of resources are outside the Federal Reserve System. In India, the indigenous bankers, accounting at present for 50 per cent of the banking business in the country, are still beyond the influence of the Reserve Bank.
Thirdly, even if all banks were member-banks, commercial banks may not always co-operate with the central bank and may not follow its lead. Such co-operation is indispensable for a successful control of credit.
Fourthly, there are non-banking elements in the financial structure of a country. Among these are the various circumstances that affect the temper of the business community. These are beyond the scope of central banking action.
Finally the central bank cannot control the ultimate use to which credit may be put. Strictly commercial loans, for instance, may be used for speculative purposes.
This, however, does not mean that any attempt to control credit on the part of the central bank is bound to fail. These are the limitations to which the action of the central bank is subject.
Even if the bank can control credit, it does not necessarily follow that the objectives of the bank like price stability, exchange stability, etc., will automatically follow. There are difficulties in their way too.