ii. Answer: The qualitative instruments of credit control include: (i) Marginal Requirements (ii) Rationing of Credit (iii) Moral Suasion (iv) Direct Action However, the effectiveness of this method requires that there are no leakages of credit from productive areas to the unproductive or speculative areas. This website uses cookies to improve your experience while you navigate through the website. 2. Lack of such a market renders the policy of open market operations ineffective. Similarly, the increases in the cash reserves of the commercial banks as a result of the open market purchase of securities by the central bank may be used by them to repay the outstanding loans from the central bank. TOS4. Opposite effects will be obtained when the central bank sells securities. The various methods or instruments of credit control used by the central bank can be broadly classified into two categories: The methods used by the central bank to influence the total volume of credit in the banking system, without any regard for the use to which it is put, are called quantitative or general methods of credit control. As a result, the investors tend to avoid borrowing from the banks and tend to raise funds by selling long-term securities. Similarly, during depression, the purchase of securities from the banks by the central bank may not induce the commercial banks to expand credit despite their cash reserves. Quantitative Measures of Credit Control. . You also have the option to opt-out of these cookies. (ii) Sufficient quantity of eligible securities should exist with the central bank. This will lower interest rates, increase investment, production and employment, and raise consumer spending and prices. They seek to control the demand for credit for different uses by- (a) determining minimum down payments and (b) regulating the period of time over which the loan is to be repaid. Lack of Well-Developed Security Market: The success of the policy of open market operations requires the existence of a well-organised and well-developed securities market in the country. VII. In the underdeveloped countries, the bank rate policy has been called into question due to the following reasons: (i) In the underdeveloped countries, the money market is divided into two sectors- (a) the modern banking sector; and (b) the indigenous banking sector. (vi) Through selective measures, the central bank can give preferential treatment to the backward and priority sectors, such as agricultural sector, small scale sector, export sector, of the developing economies by providing special credit facilities to these sectors. All these factors may neutralise the effect of the sale of securities by the central bank. Applicants should have completed all the coursework required for the Ph.D. or Psy.D. A fall in the cash reserves of the commercial banks reduces their ability to create credit and results in multiple contractions in the total volume of credit due to the operation of credit multiplier. P.O. Methods of Credit Control. Keynes, on the other hand, was of the view that the economic activity in the economy is influenced by the effect of the bank rate on the long-term interest rates. Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features. If the commercial banks have a direct access to the central bank, then the reduction in their reserves through open market sale of securities by the central bank may be neutralised by them through borrowing from the central bank. It is the rate at which RBI extents advances to commercial banks. How do changes in cash reserve ratio affect the availability of credit? In this way, the qualitative methods of credit control come into the picture, wherein the credit is made available to productive and priority sectors, while the others are restricted. Necessary cookies are absolutely essential for the website to function properly. Effects on Reserves of Commercial Banks: Open market operations bring changes in the reserves of the commercial banks. As a result of rise in the long-term interest rates, given the marginal efficiency of capital, the businessmen will reduce their investment and the reduction in investment will result in contraction in economic activity, leading to a fall in production, employment and prices. The cookies is used to store the user consent for the cookies in the category "Necessary". For example, if the bank rate is raised to control speculative activities, it will also adversely affect the genuine productive activities. In view of falling orders, the industrialists will reduce production and employment. Thus, a favourable balance of payments will be achieved. Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet. The credit multiplier will fall from 10 to 8.3 (i.e., 1/12% = 8.3). Similarly, a fall in the bank rate makes the credit cheaper, increases the volume of credit, encourages the businessmen to borrow and invest, and increases the levels of economic activity and the price level. On the other hand, to check deflation, the central bank may reduce the cash reserve ratio from 10% to 8% and thus make available 2% excess cash reserves to the commercial banks which they utilise to expand credit. Topics include quantitative analysis, statistical inference, and the application of database technology to marketing. The Ambell Company uses batteries from two different manufacturers. Moral suasion implies informal suggestions or recommendations through circulars which the central bank may make to other banks for credit regulation. These cookies track visitors across websites and collect information to provide customized ads. (i) It is the most direct method because it controls the volume of credit by directly influencing the cash reserves of the commercial banks. (ix) This method may have depressing effect on the securities market. 2. This will, in turn, affect the level of economic activity and the price level. Explain the qualitative or selective methods of credit control. The quantitative measures of credit control are : Bank Rate Policy: The bank rate is the Official interest rate at which RBI rediscounts the approved bills held by commercial banks. credit in certain selective sections of the society. Regulation of Consumer Credit is a quantitative credit control measure of Central Bank. Open market operation policy: When central bank controls credit by buying and selling a bond, debenture, securities etc. The growing tendency of almost all countries after the World War I towards economic rigidities, such as stabilisation of prices, wages, interests, etc., has reduced the importance of bank rate. The correct approach would be to integrate the two views to have a complete understanding of the influence of the bank rate policy on the volume of credit and level of economic activity. Monetary Policy: Objectives, Advantages and Disadvantages. NCERT Solutions For Class 12 Maths. The effectiveness of the bank rate policy depends on the fulfillment of a number of assumptions. By changing the eligibility rules or the conditions under which the commercial banks can secure loans the central bank influences the availability of credit; strict eligibility rules make it difficult, and lenient eligibility rates make it easy, for the commercial banks to get loans from the central bank. From the published material the banks and the general public can anticipate the future changes in the policies of the central bank. (ii) Maintaining equilibrium between saving and investment in the economy. For smooth functioning of the economy RBI control credit through quantitative and qualitative methods. 5. The large sales of long-term securities and the resultant diversion from long- term to short-term securities will lower the prices and raise the interest rates of long-term securities. in open market is known as open market operation policy. (v) Borrowing and investment of the businessmen depend upon the prevailing interest rates of the commercial banks. The payment made by the central bank to the sellers is through cheques which are deposited with the commercial banks. Further, the bank rate policy becomes ineffective in the underdeveloped money markets as the banks do not approach very much the central bank for credit facilities. 1. Qualitative Methods of Credit Control: This cookie is set by GDPR Cookie Consent plugin. Ineffective in Controlling Deflation: Bank rate policy is more ineffective in off-setting depression than in controlling inflation. Changing Methods of Business Financing: Recent changes in the methods of business financing have also reduced the importance of interest rates and hence of the bank rate in investment decisions. No method, taken alone, can produce effective results. Quantitative Methods of monetary policy includes those instruments which focus on the overall supply of the money. In its capacity as lender of last resort, the central bank helps the commercial banks by rediscounting the first class bills (i.e., by advancing loans against approved securities). The cost of credit (or the price dimension of the bank rate policy) determines the quantity of borrowing demanded from the central bank and the availability of credit (or the quantity dimension of the bank rate policy) determines the quantity supplied by the central bank. Transfer Student GPA: 3.66-3.93: SAT Total: 1310-1460: ACT Composite: 29-33: TOEFL IBT: 100-108: Enrolled Student Demographic Information (Fall 2020) Religious Preferences for Enrolled Students (Fall 2020) Apply Now.Contact Us. Bank rate policy: This is one of the main policies of credit control. Some of the important general credit control methods are. The open market operations suffer from the following limitations: I. (viii) In planned developing economies where the public sector accounts for the larger part of the nations investment and is equipped with a set of more direct and powerful instruments of controlling the level of economic activity, the bank rate loses much of its importance. The cookie is used to store the user consent for the cookies in the category "Performance". These instruments are designed to control the total volume/money of the bank credit in the economy. (ii) Commercial banks are not prejudiced against rediscounting their eligible securities with the central bank. The Cash Reserve Ratio (CRR) refers to a certain percentage of a banks deposits which the bank keeps in cash, by law or convention, with the central bank as a reserve. (a) Let us assume that the entire commercial banking system is one unit. Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features. CREDIT CONTROL METHODS OF RBI It is one of the important function of RBI for controlling supply of money or credit. The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional". The policy of open market operations will be successful if there exists a sufficient stock of suitable securities with the central bank. Under the consumer credit system, a certain percentage of the price of the durable goods is paid by the consumer in cash. (vi) Frequent changes in the cash reserve ratio are not desirable. Unemployment of workers will reduce general demand for goods and services, and, thereby their prices. Study Materials. Similarly, if the central bank desires to reduce the money supply from OM to OM1, it must raise the interest rate from Oi to Oi1; and if it desires to increase the money supply from OM to OM2, it must reduce the interest rate from Oi to Oi2. (iv) In the underdeveloped countries, the central banks do not have enough experience in using the technique of open market operations. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc. 3. Bank rate: It is the rate of interest at which central bank lends funds to . Qualitative or Selective Methods: ADVERTISEMENTS: The methods used by the central bank to regulate the flows of credit into particular directions of the economy are called qualitative or selective . The cookie is used to store the user consent for the cookies in the category "Other. A change in CRR . This is mainly because of the fact that interest cost forms a very low proportion of total cost of investment in these countries. (ii) In the underdeveloped countries, most of the commercial banks enjoy an excess liquidity. The margin refers to the amount of cash one must put up in addition to what one may borrow on his stock from a bank. This is as per the recommendations of Narasimham committee. The important qualitative or selective methods of credit control are; (a) marginal requirements, (b) regulation of consumer credit, (c) control through directives, (d) credit rationing, (e) moral suasion and publicity, and (f) direct action. In the broad sense, open market operations imply the purchase and sale by the central bank of any kind of eligible paper, like, government securities, bills and securities of private concerns, etc. This reduces their dependence on the central bank for financial accommodation. Major differences among the three quantitative methods of credit control are given below: (i) It is an indirect method of influencing the volume of credit in the economy. Central Bank also performs commercial banking business. Similarly if the central bank wants to use the open market operations policy to change the money supply in the desired directions, it must surrender its control over the interest rate and must allow it to go where it will go. 2. The higher cash reserve requirements may lead the commercial banks to sell the securities in hand which, in turn, will reduce their prices in the market. Simultaneous Determination of Interest Rate and Money Supply: The central bank, through open market operations, cannot simultaneously fix the security price (i.e., interest rate) and the reserves of the commercial banks (i.e., money supply). Share Your PPT File. 2. A change in the bank rate leads to change in other interest rates prevailing in the market. The expansion and control of supply of money is done by Open market operations. Rationing of credit . Education This is Class 12 Economics Project as per the CBSE Guidelines ( 2019-20) Download This Project From Here : https://drive.google.com/file/d/1EJZakkGzp5ubvAIYpShMQRB26LVsXOXx/view?usp=drivesdk Topic : Role of RBI in Control of Credit Reserve Bank of India - Histroy Reserve Bank of India - Introduction developed which will apply to the 12 million new . Methods and instruments of credit control Quantitative Or General Methods Qualitative Or Selective Methods 1. Analytical cookies are used to understand how visitors interact with the website. TOS4. Unlike the quantitative methods, which affect the total volume of credit, the qualitative methods affect the types of credit, extended by the commercial banks; they affect the composition rather than the size of credit in the economy. Regulation of Consumer Credit is a quantitative credit control measure of Central Bank. The lowering of the bank rate as done during inflation, on the other hand, causes a fall in market interest rates, as a result the borrowings from the banks will increase and the volume of credit will be expanded. (iii) It is suitable when only marginal changes are desired in the cash reserves of the commercial banks. Privacy Policy3. (A) Lack of double coincidence of wants (B) Difficulty in the measurement of value (C) Difficulty in store of value (D) All of these Answer Question 2. As a result, they have become more and more independent and do not feel the necessity to approach the central bank for financial accommodation. While the bank rate policy and the open market operations, due to their limitations, are appropriate only to produce marginal changes in the cash reserves of the commercial banks, the method of cash reserve ratio is a more direct and more effective method in dealing with the abnormal situations when, for example, there are excessive reserves with the commercial banks on the basis of which they are creating too much credit, leading to inflationary situation. The policy of open market operations is based on the following assumptions: (i) A well-organised and well-developed securities market should exist. Which is not a quantitative method of credit control? (iii) Even if the commercial banks are able to provide loans for productive purposes, it is not possible for them to control the ultimate use of these loans. This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other. Open Market Operations Policy during Depression: During depression, the central bank attempts to increase the volume of credit by purchasing the securities from the public. It assumes special significance in the underdeveloped countries where the bank rate and the open market operations are not so effective because of a number of limitations. Limitations of Selective Credit Controls: The selective controls suffer from the following limitations: (i) The selective credit controls are effective only in influencing the credit policies of the commercial banks and not of the other non-bank financial institutions. CREDIT CONTROL METHODS OF RBI. An increase in bank rate leads to an increase in other rates of interest, and . The important quantitative methods of credit control are: (a) bank rate, (b) open market operations, and (c) cash-reserve ratio. In other words, SLR refers to that portion of total deposits which a commercial bank has to keep with itself in the form of liquid assets viz., cash, gold or approved Government securities. The comparative study of the three quantitative methods of credit control shows that each method has its own merits and demerits. The policy of open market operations requires that the commercial banks should have no access to the central banks for financial accommodation. When the bank rate rises, the commercial banks immediately raise interest rates. The central banks also use publicity as a method of credit control. By changing the ratio (increase or decrease) of these reserves, RBI can controlthe credit power of banks. Topics Covered::--1) Quantitative Method of Credit Control a_ Bank rate policy b_ Open Market operation c_ Legal reserve ratio (CRR & SLR)2) Qualita. Less Sensitive to Changes in Interest Rates: Recent changes in taxation and production costs have made the businessmen less sensitive to the changes in the rates of interest. Welcome to EconomicsDiscussion.net! A decrease in the cash reserve ratio may not be able to expand credit during depression because of low future expectations of the investors. Quantitative credit controls are used to maintain proper quantity of credit of money supply in market. It is also known as general credit control. This reduces the cash reserves of the commercial banks. 5. These cookies will be stored in your browser only with your consent. The internal and external effects of the bank rate policy may be conflicting. In fact it was abolished in England in 1972. IV. Lord Keynes lent his warm support to this weapon of credit control. (v) This method is discriminatory in nature. Bank Rate is the selective credit control measure used by the Central Bank of the country. Share Your PDF File (iii) In the underdeveloped countries, many commercial banks have a fluctuating cash reserve ratio and sometimes this ratio is much higher than the minimum legal requirement. Price of securities is inversely related to the interest rates (01 yields). During boom period, when the businessmen are over- optimistic and the marginal efficiency of capital is high, the demand for bank credit cannot be easy checked by increasing the bank rate. The important quantitative methods of credit control are- (a) bank rate, (b) open market operations, and (c) cash-reserve ratio. These cookies track visitors across websites and collect information to provide customized ads. But the bank rate policy becomes ineffective in the absence of a well- developed bill market in the country. Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors. (c) It is difficult for the commercial banks to control the ultimate use of credit by the borrowers. Control over marginal requirements means control over down payments that must be made in buying securities on credit. (ii) This method is not effective when the commercial banks happen to possess large foreign funds. The cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. which they have to keep with RBI in the form known as cash reserves. In such a case ever if cash reserve ratio is raised, ample reserves remain after satisfying the minimum requirements. Consumer credit refers to a personal debt taken by a consumer on the purchase of goods and services for the satisfaction of wants. In this sense, bank rate is the effective rate for lending or borrowing which prevails in the market. There are 2 types of methods employed by the RBI to control credit creation: 1. Make pairs. The method of variable cash reserve ratio, on the other hand, is more direct and drastic in its effects without any unfavourable repercussion on the prices of government securities. For additional cash requirements they freely approach the central bank. Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. Quantitative Methods The quantitative instruments are also known as general tools used by the RBI (Reserve Bank of India). (A) Cheque and draft (B) Promissory note In other words, credit rationing aims at- (a) limiting the maximum loans and advances to the commercial banks, and (b) fixing ceiling for specific categories of loans and advances. 40. The sale of securities by the central bank to commercial bank or to the public causes the banks to make payments to the central bank; as a result the cash balances of the banks fall, their power to lend decreases and, ultimately, the volume of bank credit declines. The lowering of the CRR, on the other hand, causes an expansion of credit as the banks are to keep a smaller reserve at the central bank and so get a larger fund for lending. The Reserve Bank of India gives frequent instructions to other banks to keep higher margins for giving loans against essential commodities like paddy or rice, wheat, oilseeds, cotton textile, sugar, pulses, edible oils, etc. Effectiveness of Bank Rate Policy in Under-Developed Countries: The necessary conditions for the success of bank rate policy are more satisfied in the developed countries than in underdeveloped countries. Money and Banking Class 12 MCQs Questions with Answers Question 1. The qualitative or selective credit controls on the other hand, are meant to regulate the terms on which credit is granted in specific sectors. If the central bank wants to fix the security price, and thus the interest rate, below (or above) the natural rate of interest, i.e., the market determined rate of interest rate, it must be prepared to buy (or sell) an unlimited quantity of securities at the fixed lower (or higher) price, and must accept an increase (or decrease) in the reserves of commercial banks and thus in money supply. iv. Earlier in 1991 the rate was 12% and as on 2005, it was 6% and it was 5.5% in 2008. As these assumptions are not fully achieved in reality, the bank rate policy suffers from a number of limitations: The Radcliffe Committee in Great Britain and the American Committee on Money and Credit have pointed out that the entrepreneurs are not very sensitive to changes in the interest rates while making their investment decisions. (v) Borrowers should respond to the policy of open market operations and the consequent changes in the banking operations. (b) The central bank may charge a penal rate of interest, over and above the bank rate, on the money demanded by the bank beyond the prescribed limit. Oi is the rate of interest. (c) The central bank may refuse to grant more credit to the banks whose borrowings are found to be in excess of their capital and reserves. If a security has a market value of Rs.100 and if the marginal requirement is 60% the maximum loan that can be advanced for the purchase of security is Rs. (ii) The measures influence only the particular areas of the economy (e.g., speculative activities) without affecting the economy as a whole. (ii) The bank rate indicates the rate at which the commercial banks can get accommodation from the central bank against the government and other approved securities. (iv) The selective credit controls are particularly useful in the developing countries where quantitative methods are not so much effective because of underdeveloped money market. Ans: Commercial bank is a financial institution which performs the functions of accepting deposits from the public and making loans and investments, with the motive of earning profit. The SLR has been reduced to 25% on the entire net demand. By clicking Accept, you consent to the use of ALL the cookies. In such situation, there might be sharp reactions to the open market operations. 17. In modern times, the commercial banks have acquired sufficient liquid resources of their own. Thus, an increase in the marginal requirements will reduce the amount that can be borrowed for the purchase of a security. NCERT Solutions Class 12 Accountancy. Welcome to EconomicsDiscussion.net! Thus, the monetary policy receded into the back- ground and the fiscal policy gained more and more importance. NCERT Solutions For Class 12 Chemistry. The Volume of credit will decrease, the level of economic activity will decline and the price level will fall. 3. 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