Economics [3 marks Question-Answer]

Quantitative credit control refers to those credit control instruments which are adopted by the country's Central Bank to influence the total volume of credit in the country. It affects all the sectors making use of bank credit.
Two Quantitative Credit Control Measures
(i) Bank Rate : The Central Bank (RBI) controls credit (or money supply) through changes in its bank rate. An increase in bank rate increases the cost of borrowing from the central bank. If forces the commercial banks to increase their lending rates which discourages people from taking loans from banks.
(ii) Open Market Operations : The Central Bank (RBI) controls credit through its open market operations. Under it, the central bank buys or sells the government securities in the open market. Sale of securities by central bank reduces the reserves of commercial banks which adversely affects bank's ability to create credit. And purchase of securities from the open market increases the resources of banks and hence their lending capacity.

The central bank acts as a banker to the government both central as well as state governments in the following ways:
(i) As the banker to the govt. central bank accepts receipts and makes payments for the govt. It provides short term loans to the govt. in times of difficulties.
(ii) As govt. agent, the central bank undertakes sale and purchase of the government securities and also manages the public debt (national debt) and foreign debt.
(iii) The central bank also acts advisor to the govt. especially on monetary, banking and financial matters.

Sale and purchase of government securities by the central bank is called open market operations.
→ When central bank purchase securities from commercial banks and general public, it increases the cash reserves of the banks and hence, their lending power.
→ When securities are brought (whether from the public or banks) money ultimately will come to banks.
→ When central bank sells securities in the market, it reduces deposits in banks which in turn reduces lending power of banks. In this way, the central bank controls credit (or money supply) through its open market operations.

The bank rate is the rate at which the central bank lends money to banks.
Bank Rate as a method of Credit Control :
Any change in bank rate affects the lending rates of commercial banks. Consequently, the cost and availability of credit also changes in the market.
→ A low bank rate (in a situation of deflation) encourages the banks to keep small proportion of their deposits as reserves since borrowing from central bank is now cheaper than before. As a result banks use a greater proportion of their funds for giving out loans to the borrowers. Thus, money supply increases in the economy.
→ The central bank raises the bank rate in a situation of inflation. As a result, cost of credit increases, which in turn discourages the flow of credit. As a result, money supply decreases.

(a) The Reserve Bank of India enjoys the monopoly of note-issue in India.
(b) Two Qualitative Methods of credit control: The methods used by the RBI to regulate the flow of credit into particular directions of the economy are called qualitative methods.
(i) Margin Requirements: A margin is the difference between the amount of the loan and market value of the security offered by the borrowers against the loan. By changing the margin requirement, the central bank can alter the amount of loans made against securities by the banks.
(ii) Rationing of Credit: Rationing of credit means fixation of credit quotas for different sectors of the economy.