Question

What is meant by 'Credit rationing'?

Answer 1

Rationing of credit is a method by which the Central Bank seeks to limit the maximum amount of loans and advances and, also in certain cases, fix ceiling for specific categories of loans and advances. Under this method, the Central Bank fixes a maximum limit for loans that a commercial bank can provide to a particular sector or for all purposes. This method restricts the flow of credit in undesirable sectors & diverts it into the most desirable sector. For example: The central bank has raise the maximum ceiling on agriculture sector to promote the flow of credit in Rural sector, this is done to encourage the activity in agriculture sector.