Further, as a technique, reserve ratio can only influence the volume of reserves of the commercial banks. When prices fall, the various elements in the cost of production like wages citations of Bank Rate Policy The report of Macmillan Committee stated that the bank rate policy is an absolute essay for the sound management of a monetary system. In this framework the commercial banks are to be said to necessarily take after the advance giving tenets demonstrated by central bank. Moral Suasion Moral suasion refers to the persuasive approach of the central bank towards the commercial banks in making the latter follow and implements the policies of the former. It is concluded from the above analysis that Quantitative controls are indirect, while Qualitative controls are direct.
Variable reserve ratios do not affect the earning assets of banks unless banks sell securities to increase their reserves. There is shrinkage in investment on capital assets due to the shortage of finances. It is a protection against the price changes. As the requirements of benchmarking become more complex and dynamic, the research methods have come to include case studies Yam et al. This gives result in the fall in the cash reserves of the Commercial Banks, which in turn reduces the ability of create credit.
The research approaches of benchmarking studies have been expanding their horizons. Suppose that initially the commercial banks have assets worth Rs 1000 crores and the cash-deposit ratio is 10. Direct Action: The method of direct action is the most effective weapon of Central Bank to control credit creation. Therefore the effect of this weapon may not be immediate due to this time lag. How can my business improve its credit control procedures? On the other hand, if the reserve ratio is raised, the banks will be required to keep larger balances with the central bank. It is an important weapon of edit control. So the banks borrow less.
As a reader, one can see that the telescreens are effective in instilling fear into people when Winston starts writing in his diary. At this rate the central bank rediscounts bills of exchange and government securities held by the commercial banks. Qualitative method of Credit Control in Central bank use qualitative method to meet up certain missions. It is a very effective anti-inflationary device because it controls the expansion of credit in those sectors of the economy which breed inflation. Direct Action: Direct action implies measures like refusal on the part of the central bank to rediscount for the banks whose credit policy is not in accordance with the wishes of the central bank or whose borrowings are excessive in relation to their capital and reserves. It is otherwise known as 'discount rate'. If the businessmen take the view that prices will continue to rise, a slight rise in the rate of interest will not discourage them to expand their activity with borrowed money.
Level of Bank Rate in relation to Market Rate: The efficacy of the discount rate policy as an instrument of credit control depends upon its level in relation to the market rate. What are the main Methods of Credit Control? Here there is no element of compulsion. The holders of long-term securities will, therefore, sell their securities and invest in short-term securities. This method is being successfully used for controlling credit in developed countries where the securities market is highly developed. Rationing of Credit Rationing of credit is another method of selective credit control. During the normal period this initial deposit requirement may be reduced to just 10%. Thus with the increase in the cost of borrowing funds, there will be a disincentive for investors and business firms to borrow from the commercial banks.
Because of these limitations, the bank rate policy has lost its importance. The commercial banks may be willing to expand credit. Discriminatory: Selective controls unnecessarily restrict the freedom of borrowers and lenders. Need for Credit Control: Controlling credit in the Economy is amongst the most important functions of the Reserve Bank of India. Suppose the central bank of a country wants to control expansion of credit by the commercial banks for the purpose of controlling inflationary pressures within the economy. Finally, it tends to malallocate resources by shifting them away from industries which are covered by credit regulations and lead to the expansion of other industries which do not have any credit restrictions.
A Regulation of Margin Requirements: This method is employed to prevent excessive use of credit to purchase or carry securities by speculators. Now the commercial banks will nave additional cash which will lead to credit expansion. It may even fix a ceiling for specific categories of credit. Collection 27 Divide your customers into Good, Average and Bad, and set a Collection Policy for each category. Regulation of consumer credit: The Central Bank to regulate the consumer credit, fixes the down payments and the period over which the installments are spread.
Moreover, the changes in reserves involve far larger sums than in the case of open market operations. It is better to put in place proper procedures, which enable the early identification of potential bad debts. This will lead to increased volume of trade, investment, production and employment and ultimately leads to the rise in the price level. Broadly stated, the objective of selective credit control in India is one of preventing speculative hoarding, with the help of bank credit, of certain essential commodities like food-grains and basic raw materials and, thereby, checking an undue rise in their prices. Reducing the down payments tends to increase the demand for credit for particular durable consumer goods on which the central bank regulation is applied. Second, interest rates form an insignificant part of the total cost of holding and production of goods.
Methods of Selective Credit Control The important methods of selective credit control policies are discussed in detail. It publishes different to add, news, magazine, bulletin etc to encourage the to control credit. Foreign investors are encouraged to keep their cash balances within the county so as to earn the increased rate of interest. On the other hand, if businessmen are optimistic during a boom, the sale of securities by the central bank to contract the supply of bank money and even the rise in market rates cannot discourage them from getting loans from the banks. Variation of Cash Reserve Ratios The weapon of variation of cash reserve ratios has been suggested as a supplement to other methods of credit control because of its efficacy under all conditions. Further, since open market operations involve the sale and purchase of securities on a day-to-day and week-to-week basis, the commercial banks and the central bank which deal in them are likely to incur losses.
But the effectiveness of this method of credit control is debatable and it is usually applied along with the other methods control along with the other methods of credit control. On the other hand, if it wants to expand credit, it reduces the margin requirements. Raising the reserve ratio for all banks is not justified in the former region though it is appropriate for the latter region. Through such publicity, the commercial banks are guided and change their lending policies accordingly. On the off chance that credits are brought up in business sector, then national bank builds that rate so advances giving force of banks and the quantity of advances into the business sector ought to be diminished and the other way around. It is used as a supplement to other methods of credit control.