Briefly explain the 'change in bank rate policy' as a credit control method adopted by the Central Bank.
A bank rate is the interest rate at which a nation's central bank lends money to domestic banks, often in the form of very short-term loans. Bank rate is a rate at which the central bank discounts
first-class bills or advance loans against approved securities to commercial
banks. When the central bank raises the bank rate, the cost of borrowing of
the commercial banks will increase, so that they will also charge a higher rate
for loans and advances made to their customers and, thus, the market rate of
interest will go up. Increased market rate or increase in the cost of borrowing
will discourage credit creation, and their demand for credit falls.
On the other hand, When the bank rate is
lowered, the cost of borrowing of the commercial banks will decrease, so that
they will also charge a lower rate for
loans and advances made to their customers and, thus, the market rate of
interest will go down. Decreased market rate or decrease in the cost of
borrowing will encourage business activity, and their demand for credit rises.
A bank rate is the interest rate at which a nation's central bank lends money to domestic banks, often in the form of very short-term loans. Bank rate is a rate at which the central bank discounts first-class bills or advance loans against approved securities to commercial banks. When the central bank raises the bank rate, the cost of borrowing of the commercial banks will increase, so that they will also charge a higher rate for loans and advances made to their customers and, thus, the market rate of interest will go up. Increased market rate or increase in the cost of borrowing will discourage credit creation, and their demand for credit falls.
On the other hand, When the bank rate is lowered, the cost of borrowing of the commercial banks will decrease, so that they will also charge a lower rate for loans and advances made to their customers and, thus, the market rate of interest will go down. Decreased market rate or decrease in the cost of borrowing will encourage business activity, and their demand for credit rises.
