Credit controls by Central banks

the method or strategy that the central bank Controls or restricts the country's credit and credit supply to desirable levels by adopting or all forms of banking and finance Able to control the credit creation capacity of the organization is called debt control system. Loans are required to continue economic development activities. It is the central bank Provides and controls. Waiting for loan supply If more or less, the normal pace of the economy is disturbed.

If the supply of credit in the country is more than before, the purchasing power of the currency decreases, and if the supply of credit decreases, the purchasing power of the currency increases. Such a change in the purchasing power of currency creates instability in the economy, disrupting the normal course of business. Such ups and downs in the business cycle have serious adverse effects on society and the economy as a whole. To protect the economy from such disasters, the central bank undertakes credit control measures.

Quantitative debt control method can control the overall debt amount. However, debt control is not possible in any particular case. On the other hand, it is possible to manage or control the debt in a particular case by qualitative debt control methods. But overall debt control is not possible by it. Qualitative credit control affects the borrower and quantitative credit control affects the lender.

Qualitative credit control methods have risks. By preventing inflation, recession may occur in the country. Because in this method the amount of investment is reduced. But the qualitative debt control system does not reduce investment, rather consumption can decrease in special cases. As a result, partial containment of inflation is possible.

The effectiveness of quality credit control can be seen in the United States during and after World War II. With this type of credit control system, the hand of the central bank is strengthened. In underdeveloped countries there is a special need for efficient use of resources, transfer of resources from unproductive sectors to productive sectors and qualitative debt control systems for development.

Credit control methods of central bank

The method by which the central bank reduces or increases the amount of total bank credit is called quantitative credit control method. Changes in bank rates, open market policies, changes in cash reserves etc. are the main methods of quantitative credit control. Methods of quantitative debt control are discussed below:

Bank rate change

The amount of credit given by the central bank to commercial banks through the change in bank rate can control The rate at which central banks exchange various.

Bills issued by banks and commercial banks are called bank rates. The central bank is the last resort for loans from other banks. When the depositors withdraw their deposits from the banks at a rapid rate, these banks seek loans from the central bank to maintain their financial condition. In such a situation, the central bank increases the bank rate. As a result of increase in bank rates, other banks also increase their interest rates. This discourages borrowers and reduces the amount of loans in the bank market. And when the amount of credit decreases, the central bank lowers the bank rate. As a result, loans are available at favorable terms in other banks and the amount of loans in the market increases. That is, if the bank rate increases, the loan amount decreases and if the bank rate decreases, the loan amount increases. Thus the central bank controls the amount of credit by changing the bank rate.

Generally, the central bank changes the bank rate at the following times:

First, central banks raise bank rates during times of inflation in the economy. Due to the increase in bank rates, the cost of commercial banks' loans is higher. As a result, less money comes to the central bank for loans and commodity prices fall by reducing aggregate demand in the economy. As a result inflation is curbed.

Second, central banks lower bank rates during currency contraction. As a result, the cost of commercial banks' loans is low, so the Central Bank rushes for loans. Later, due to higher lending, the supply of money in the economy increases and prevents the rise in commodity prices and currency contraction.

Open Market Method

Open market policy is the second quantitative method of central bank credit control. Purchase of bonds in the market by the central bank to control the debt The sale is called open market policy. The central bank controls the amount of debt in the country by buying and selling various types of bonds is able When the central bank wants to reduce the amount of debt, it sells approved bonds in the market. Commercial banks, other banking institutions and the public purchase these bonds through cheques. When checks are dishonored, the cash reserves of check-cashing banks are reduced. This reduces their creditworthiness. Again, when the central bank wants to increase the amount of credit in the market, it buys bonds from the market. As a result, the amount of reserve money in commercial banks increases. As a result, their lending capacity increases. The open market policy by the central bank is a powerful effective mechanism to maintain the stability of the currency market. If there is a change in the credit market as a result of gold import and export, then the open market policy plays an important role.

It is bad for the economy when the amount of debt increases due to the import of gold in the country. In this situation, the central bank sells bonds in the market and withdraws additional money and gold from the market. Again, if gold exports reduce debt, the central bank buys bonds and the gold export problem in the currency market is eliminated. Central bank's open market policy works when there is inflation or deflation in the economy. When inflation exists in the economy, the central bank withdraws currency from the country's money market by selling bonds. This in turn curbs inflation by reducing commodity prices. Again during currency contraction the central bank takes the opposite position and prevents currency contraction. In this way central bank controls the credit through open market policy.

Change in reserve ratio

Commercial banks in every country are required by law to keep a certain portion of their total deposits as reserves in the central bank. This fixed amount of money is called reserve rate. The lending capacity of commercial banks largely depends on their accumulated reserves with the central bank. When the central bank sees that the amount of credit given to the commercial banks is increasing, the central bank forces the percentage of reserves of the commercial banks to increase and as a result, the ability of the commercial banks to create loans decreases. Again, if the central bank reduces the reserve rate, the lending capacity of commercial banks increases. The central bank increases the reserve rate when inflation occurs in the economy and decreases the reserve rate during deflation. Thus, by changing the reserve rate, the central bank controls the credit of commercial banks and restores balance to the economy.

Credit rationing

The imposition of special restrictions on borrowing is called credit rationing. It basically refers to discriminatory lending by the central bank to commercial banks. This principle is adopted when there is a need to create any disparity in loans between different applicants. Again, the central bank determines the loan in the light of the qualitative balance of the collateral against which there is a possibility of getting a loan. Central banks use direct credit reduction through debt rationing, usually during times of extreme inflation.

Qualitative debt control method

The method by which the amount of debt is controlled only in special cases or in a particular class without controlling the total amount of debt is called qualitative debt control method. If the quantitative credit control method is not possible to control the credit, the central bank controls the credit through the qualitative credit control method. Below is a discussion of quality credit control methods.

Allocation of credit:

First, the central bank can impose a ceiling on the total loans and advances of commercial banks, so that banks Loans and advances paid. This ceiling cannot be exceeded.

Second, the central bank can set a minimum rate on the capital of commercial banks and their total assets. The central bank controls lending by raising or lowering the minimum rate at any time.

Change in Marginal Rate of Guarantee

While giving loans to commercial banks in exchange of approved bills or security papers, the central bank lends less than the written value of them at the rate at which the central bank lends less than the written value of the approved bills or security papers. That rate is called the marginal rate of bail. For example, when a person wants to take a loan by pledging shares, the bank gives a loan on its partial value instead of giving a loan equal to the value of the share. In this case, if a loan of 90 taka is obtained by guaranteeing a share of 100 taka, then the margin will be 10%. To reduce the amount of central bank loans If desired, increase the amount of margin and increase the amount of loan Reduces the amount of margin if desired. Thus the margin of bail The central bank can control credit by raising or lowering rates.

Moral pressure

The central bank sometimes gives moral pressure to the commercial banks to increase or decrease the amount of loans. If there are few commercial banks in the country, the central bank can easily maintain direct contact with them. In this regard, the central bank requests the commercial banks not to provide loans to non-essential sectors for the sake of patriotism. Thus induced into the intimate environment, commercial banks strive to fulfill the objectives of the central bank.

Promotion

Central banks also control credit through promotions. These campaigns are: (a) preparation of weekly or monthly property and filing lists, (b) publication of business, industry and trade information, (c) own operations and By making accounts regarding financial arrangements etc. This affects the lending practices of commercial banks. As a result, the loan amount is controlled.

Direct System

Central Bank at times By issuing direct orders to commercial banks Can regulate lending practices. In this case, the central bank directly asks the commercial banks to increase or decrease the loan amount.

According to this procedure, non-compliant commercial banks are not given benefits in some special cases and the following disciplinary measures are taken:

Currently, consumers purchase durable consumer goods such as refrigerators, televisions, radios, etc. on installment plans. In this case, the central bank can impose various restrictions on all these transactions for the purpose of controlling credit. E.g. reduces the number of installments. These create obstacles in the purchase of goods. Again increasing the number of installments can increase the demand for loans for consumer goods. Thus the central bank can control consumer credit.

Control by Directives

Currently, many central banks use directives as a qualitative mechanism. In order to control the debt, the central bank issues some instructions and enforces the instructions.

Generally, with the help of the above method, the central bank controls the credit of commercial banks and maintains the balance in the economy and maintains the stability of commodity prices.