Credit control methods-

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In this article we will try to understand Critical explanation of the the quantity and qualitative methods of credit control

Introduction:

Credit control refers to the measures taken by central banks or other monetary authorities to regulate the supply of credit in the economy, to stabilize prices, and to ensure economic stability. The control of credit is one of the most important tools available to central banks, and it is used to influence the supply and cost of credit in the economy. The objective of credit control is to regulate the volume and direction of credit, which can be used to influence the level of economic activity, the distribution of income and wealth, and the level of inflation. The two main methods of credit control are quantitative and qualitative methods.

Quantitative Methods of Credit Control:

Quantitative methods of credit control refer to the measures taken by central banks or other monetary authorities to regulate the supply of credit by controlling the quantity of money available in the economy. There are several quantitative methods of credit control, including:

Open Market Operations: Open market operations refer to the purchase or sale of government securities in the open market by the central bank to regulate the supply of money in the economy. When the central bank buys government securities, it injects money into the economy, increasing the supply of credit. Conversely, when the central bank sells government securities, it reduces the supply of credit in the economy.

Bank Rate Policy: Bank rate policy refers to the interest rate at which the central bank lends money to commercial banks. By raising or lowering the bank rate, the central bank can influence the cost of credit, which can in turn influence the level of economic activity. When the bank rate is high, commercial banks have to pay more to borrow money from the central bank, and this makes borrowing more expensive for their customers. When the bank rate is low, borrowing is cheaper, and this can stimulate economic activity.

Cash Reserve Ratio: Cash reserve ratio refers to the percentage of deposits that commercial banks are required to hold as reserves with the central bank. By raising or lowering the cash reserve ratio, the central bank can influence the amount of credit that commercial banks can create. When the cash reserve ratio is high, commercial banks have less money to lend, which reduces the supply of credit. Conversely, when the cash reserve ratio is low, commercial banks have more money to lend, which increases the supply of credit.

Statutory Liquidity Ratio: Statutory liquidity ratio refers to the percentage of deposits that commercial banks are required to hold in the form of liquid assets such as government securities, cash, and gold. By raising or lowering the statutory liquidity ratio, the central bank can influence the amount of credit that commercial banks can create. When the statutory liquidity ratio is high, commercial banks have less money to lend, which reduces the supply of credit. Conversely, when the statutory liquidity ratio is low, commercial banks have more money to lend, which increases the supply of credit.

Qualitative Methods of Credit Control:

Qualitative methods of credit control refer to the measures taken by central banks or other monetary authorities to regulate the supply of credit by controlling the quality of credit available in the economy. There are several qualitative methods of credit control, including:

Credit Rationing: Credit rationing refers to the practice of limiting the availability of credit to certain sectors of the economy. The central bank can use credit rationing to reduce the supply of credit to sectors that are considered to be overheating, and to increase the supply of credit to sectors that are considered to be underperforming.

Selective Credit Controls: Selective credit controls refer to the measures taken by central banks or other monetary authorities to regulate the supply of credit to certain sectors of the economy. For example, the central bank may impose restrictions on the amount of credit that can be extended for certain purposes, such as speculation or investment in real estate.

Moral Suasion: Moral suasion refers to the use of persuasion and appeals to the goodwill of commercial banks to influence their lending policies. The central bank may use moral suasion to encourage commercial banks to lend more or less, depending on the prevailing economic conditions.

Direct Action: Direct action refers to the measures taken by the central bank to directly control the lending policies of commercial banks. For example, the central bank may require commercial banks to obtain its approval before extending credit to certain sectors of the economy.

Critique of Quantitative Methods:

One of the major critiques of quantitative methods of credit control is that they tend to be blunt instruments that do not take into account the specific needs of different sectors of the economy. For example, raising the bank rate to control inflation may have a negative impact on the manufacturing sector, which may be struggling to obtain credit at affordable rates. Additionally, quantitative methods may be subject to time lags, meaning that the impact of policy changes may not be felt immediately, and may have unintended consequences.

Critique of Qualitative Methods:

One of the major critiques of qualitative methods of credit control is that they tend to be more subjective and open to interpretation. This can make it difficult for commercial banks to know exactly what is expected of them, and may lead to confusion and uncertainty in the lending market. Additionally, qualitative methods may be less effective in controlling the supply of credit in the economy, as commercial banks may find ways to circumvent the restrictions imposed on them.

Conclusion:

In conclusion, both quantitative and qualitative methods of credit control have their strengths and weaknesses, and the choice of method will depend on the specific needs of the economy. Quantitative methods tend to be more effective in controlling the overall supply of credit in the economy, but they may be less precise and may have unintended consequences. Qualitative methods tend to be more precise and can be tailored to specific sectors of the economy, but they may be less effective in controlling the overall supply of credit. Ultimately, a combination of both quantitative and qualitative methods may be needed to achieve the desired level of economic stability and growth.

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