Question

Explain any three methods of qualitative credit control.

Answer 1

Qualitative credit control methods of monetary policy includes those instruments which focus on the selected sectors of the economy. It includes :-

A. Margin Requirement:

Margin requirement refers to the difference between the current value of the security offered for loan (called collateral) and the value of loan granted. It is a qualitative method of credit control adopted by the central bank in order to stablise the economy from inflation or deflation.

B. Rationing of Credit:

Rationing of credit refers to fixation of credit quotas for different business activities which is introduced when the flow of credit is to be checked particularly for speculative activities in the economy.

C. Moral Suasion:

The central bank makes the member bank agree through persuasion or pressure to follow its directives which is generally not ignored by the member banks. The banks are advised to restrict the flow of credit during inflation and be liberal in lending during deflation.