QUALITATIVE CREDIT CONTROL MEASURES

CREDIT RATIONING

      It is a method by which the Reserve bank seeks to limit the maximum amount of loan and advances and also fix the ceiling for some specific categories of loans and Advances. For Eg : Banks must lend 40% to the priority sector lending.

MORAL SUASION

      Moral suasion means persuasion and request. Under this Central bank persuades and request the commercial bank to refrain from giving loans for speculative and non-essential purpose to arrest the inflation. And also at the same time, to counter deflation, Central bank persuades and request the commercial bank to extend credit for different purposes.

REGULATION OF CONSUMER CREDIT

      Credit made available by Commercial Banks for the purchase of Consumer Durables need to be regulated in order to Stabilize The Inflation (i.e.) Demand And Supply Of Consumer Durables.

      The consumer credit can be regulated to arrest the inflation at time of excess demand and counter deflation at deficient demand of specific goods.

VARIATION OF MARGIN REQUIREMENT

      Margin is the difference between the market value of a security and its maximum loan value.

 For Eg : A commercial bank grants a loan of Rs.8000 against a security worth Rs.10,000/- here margin is Rs.2,000.

Commercial Banks giving Loan Against Stocks Or Securities.

While giving loans against stock or securities they keep margin. If central bank feels that some goods prices are raising due to speculative activities to discourage the flow of credit, it increase the margin.

DIRECT ACTION

      When a commercial bank does not co-operate with the central bank in achieving its desirable objectives, direct action is adopted.

      For e.g.: Central bank may refuse to rediscount the bill of those banks for extreme situation, Central Bank Can Also Cancel The License Of The Bank.

OTHER RELATED CONCEPTS:

1. LIQUIDITY TRAP

      A liquidity trap is a situation in which Interest Rates Are Low and Savings Rates Are High, rendering monetary policy ineffective. In this situation, consumers choose to avoid bonds and keep their funds in savings because of the prevailing belief that interest rates will soon rise (This would push bond prices down). The remedy to economic decline is to increase the circulation of money by cutting interest rates. But once the interest rate reaches zero there’s no further action taken by central bank. Such a situation referred by economists as liquidity trap.

QUANTITATIVE EASING

It is Form Of Monetary Policy used to stimulate an economy. To increase money supply in the  economy in order to further increase lending by commercial banks and spending by consumers.

The central bank infuses a pre-determined quantity of money into the economy by Buying Financial Assets from commercial banks and private entities. When Interest Rates Can Go No Lower, the only option for central bank is to pump the money into the economy directly. This is called quantitative easing.

Note: Here No Printing Of New Notes to infuse money and quantitative easing comes with its own risks namely inflation and Depreciation of currency.

      Here, Inflation by more money in economy tend to Rise the cost of goods depreciation by more currency in supply, one can buy less foreign bonds, thus reducing the value of domestic currency.