Quatitatitive measures of credit control

Quatitatitive measures of credit control are also called general measures of credit control. These measures refer to the methods which are used to direct the total volume of credit in the banks. These measures consists of the following methods

  1. Bank rate: it means the rate of interest at which central bank discounts the bills of the commercial banks. If central bank wants to expand the credit then central bank will reduce the bank rate. Reduce bank rate will reduce the cost of borrowing of the commercial banks who in turn charge low rate of interest from their borrowers. This means the price of credit will decrease. Business community will borrow more money which leads to more investment, production, generate more employment and income in hands of people. Thus the purchasing power of people will increase and aggregate demand will also increase. While on the other hand if there is the situation of inflation means there is increase in the general price level central bank will contract the credit by increasing the bank rate. Increased bank rate will increase the cost of borrowing of the commercial banks who in turn charge high rate of interest from their borrowers. This means the price of credit will increase. Business community will discouraged to borrow money which leads to fall in investment, production, employment and income in hands of people. Thus the purchasing power of people will decrease and aggregate demand also decrease which will solve the situation of inflation. The present bank rate is 9 %.
  2. Open market operations: it means buying and selling of securities of central bank in the open market. If the central bank wants to expand the credit then it would purchase the securities from the commercial banks. Which will in turn generate the money supply in the market and if the central bank contract the credit then this means it will sell the securities to the commercial banks which in turn reduce the money supply with the commercial banks.

3. Statutory liquidity ratio (SLR): it means the ratio of reserve which the commercial banks needs to be with them as per central bank guidelines. If the central bank wants to increase the money supply in the market then it will reduce the SLR. And if central bank wants to decrease the money supply in the market then it will increase the SLR. The present SLR is 22 %.

4.Cash reserve ratio (CRR): it means the ratio of reserve which the commercial banks needs to be kept with the central bank. If the central bank wants to increase the money supply in the market then it will reduce the CRR. And if central bank wants to decrease the money supply in the market then it will increase the CRR. The present CRR is 4 %

Thus by studying the above measures it can be concluded that if the central bank wants to expand the credit then it would reduce the bank rate, SLR, CRR and purchase the securities from the open market. And if the central bank wants to contract the credit then it would increase the bank rate, SLR, CRR and sell the securities from the open market.

These are the four Quatitatitive measures of credit control

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