Explain various quantitative methods of credit control?
Question: Explain various quantitative methods of credit control?
Quantitative methods of credit control refer to the use of monetary policy tools by the central bank to regulate the availability and cost of credit in the economy. These methods are used to influence the level of credit in the economy and are aimed at achieving various macroeconomic objectives, such as controlling inflation, promoting economic growth, and maintaining financial stability. Some of the important quantitative methods of credit control are:
Reserve Ratio Requirements: Reserve Ratio is the percentage of deposits that a commercial bank must hold as reserves with the central bank. The central bank can increase the reserve ratio, which will reduce the amount of money available for lending by commercial banks, thereby reducing credit creation.
Open Market Operations: Open market operations refer to the buying and selling of government securities by the central bank in the open market. The central bank can buy government securities from commercial banks, thereby increasing their reserves and encouraging them to lend more. Conversely, the central bank can sell government securities, thereby reducing the reserves of commercial banks and discouraging them from lending.
Discount Rate Policy: The discount rate is the interest rate at which commercial banks can borrow from the central bank. The central bank can increase the discount rate, making it more expensive for commercial banks to borrow, thereby reducing credit creation. Conversely, the central bank can reduce the discount rate, making it cheaper for commercial banks to borrow, thereby increasing credit creation.
Credit Rationing: Credit rationing involves setting limits on the amount of credit that commercial banks can lend. The central bank can impose credit ceilings on commercial banks, which will limit their ability to lend, thereby reducing credit creation.
Moral Suasion: Moral suasion refers to the use of persuasion and informal pressure by the central bank on commercial banks to comply with credit policies. The central bank can use moral suasion to encourage commercial banks to reduce credit creation or to lend more, as per the macroeconomic requirements.
These quantitative methods of credit control can be used singly or in combination to regulate the availability and cost of credit in the economy. However, the effectiveness of these methods depends on several factors, such as the degree of autonomy of commercial banks, the responsiveness of borrowers to changes in interest rates, and the overall state of the economy.
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