Two qualitative methods of credit control used by the central bank are as follows:
(i) Margin requirement: Margin requirement refers to the gap between the actual value of the security offered for a loan and the value of loan provided. Suppose an individual provides collateral worth Rs 100 to the bank, and the bank grants a loan of Rs 80 to the person. Here, the margin requirement is 20 per cent. If the central bank wants to lower the credit flow in the economy, the central bank increases the margin requirement. To increase the credit flow in the economy, the margin requirement is lowered.
(ii) Credit rationing: Credit rationing refers to imposing a quota on loans for certain activities. This measure is used when the central bank wants to check the flow of credit in some particular business activities such as speculative activities. The commercial banks cannot exceed the quota limit while providing loans.
Two quantitative measures of credit control used by the central bank are as follows:
(i) Open market operations: Open market operations refer to the sale and purchase of securities in the open market by the central bank. To lower the credit flow in the economy, the central bank sells securities in the economy. To increase the flow of credit, the central bank buys government securities from the open market.
(ii) Cash reserve ratio (CRR): Cash Reserve Ratio is the minimum percentage of a commercial bank’s total deposits that the bank has to keep with the central bank in the form of cash. Whenever the central bank has to decrease the credit flow in an economy, the central bank increases CRR. Whenever the central bank has to increase the credit flow in an economy, the central bank decreases CRR.
