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Methods OF Credit Control

This file contains the notes on METHODS OF CREDIT CONTROL.
Course

Economics

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Students shared 1436 documents in this course
Academic year: 2022/2023
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Preeti Rathoure
Mahatma Jyotiba Phule Rohilkhand University
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METHODS OF CREDIT CONTROL

Central banks use various methods to control the credit available in an economy. Some of the common methods used are: 1. Monetary Policy: The central bank can control the supply of money by adjusting the interest rates. When the central bank lowers the interest rates, it becomes easier for businesses and individuals to borrow money. This can lead to an increase in the money supply and higher levels of credit. Conversely, if the central bank increases interest rates, it becomes more expensive to borrow money, which can lead to a decrease in the money supply and lower levels of credit. 2. Reserve Requirements: The central bank can also control the amount of money that banks can lend by adjusting the reserve requirement. The reserve requirement is the percentage of deposits that banks are required to hold in reserve. If the central bank increases the reserve requirement, banks will have less money available to lend, which can lead to a decrease in credit. Conversely, if the central bank lowers the reserve requirement, banks will have more money available to lend, which can lead to an increase in credit. 3. Open Market Operations: The central bank can also influence the money supply by buying or selling government securities in the open market. When the central bank buys government securities, it injects money into the economy, which can lead to an increase in credit. Conversely, when the central bank sells government securities, it takes money out of the economy, which can lead to a decrease in credit.

  1. Moral Suasion: The central bank can also use moral suasion to influence the behavior of banks. Moral suasion is a non-binding persuasion technique where the central bank tries to influence the behavior of banks through public statements and other means. For example, the central bank can encourage banks to lend to certain sectors of the economy or discourage them from lending to other sectors.
  2. Credit Rationing: The central bank can also use credit rationing to control credit. Credit rationing is a method where the central bank imposes limits on the amount of credit that banks can extend to borrowers. This can be done through direct controls or by imposing penalties on banks that exceed certain credit limits. In conclusion, central banks use a combination of these methods to control credit in the economy. The choice of method depends on the specific economic conditions and the goals of the central bank.
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Methods OF Credit Control

Course: Economics

999+ Documents
Students shared 1436 documents in this course

University: University of Calcutta

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METHODS OF CREDIT CONTROL
Central banks use various methods to control the credit available in an economy. Some
of the common methods used are:
1. Monetary Policy: The central bank can control the supply of money by
adjusting the interest rates. When the central bank lowers the interest rates, it
becomes easier for businesses and individuals to borrow money. This can
lead to an increase in the money supply and higher levels of credit.
Conversely, if the central bank increases interest rates, it becomes more
expensive to borrow money, which can lead to a decrease in the money
supply and lower levels of credit.
2. Reserve Requirements: The central bank can also control the amount of
money that banks can lend by adjusting the reserve requirement. The reserve
requirement is the percentage of deposits that banks are required to hold in
reserve. If the central bank increases the reserve requirement, banks will
have less money available to lend, which can lead to a decrease in credit.
Conversely, if the central bank lowers the reserve requirement, banks will
have more money available to lend, which can lead to an increase in credit.
3. Open Market Operations: The central bank can also influence the money
supply by buying or selling government securities in the open market. When
the central bank buys government securities, it injects money into the
economy, which can lead to an increase in credit. Conversely, when the
central bank sells government securities, it takes money out of the economy,
which can lead to a decrease in credit.

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