Selective credit controls are those measures used by RBI along with other measures to control credit. It is used as the supplement to the regular credit regulations.
The selective credit controls used by RBI are as follows:
(a) Fixation of margin requirements: A central bank changes the margin requirement from time to time to regulate the volume of the credit. The difference between the market value of securities or assents and the amount actually lent against these securities is called margin. The RBI may increase the margin to reduce the volume of credit and decrease the margin to expand the credit.
(b) Regulation of Consumer credit: Consumer credit refers to financial assistance given by banks to consumer to purchase vehicles, electronic goods, electrical items etc. In order to avoid demand pull inflation, the RBI regulates the consumer’s credit.
(c) Moral Suasion: It implies that persuasion and request made by the Central Bank to Commercial Banks to cooperate with the general monetary policy.
(d) Direction action: The RBI may take direct action against the erring commercial banks by refusing to rediscount their commercial bills and may charge penal rate of interest.
(e) Credit Rationing: The RBI through its credit rationing system, directs the commercial banks to borrow loans to a certain limit. In turn, the commercial banks will lend loans to limited sector and there the supply of money gets controlled.
(f) Publicity: The RBI gives regular publicity about money market trends, educates the commercial banks to regulate the credit. It includes publishing the monthly review of credit and business conditions and the annual reports on the banking sectors.
