Selective Instruments of Credit Control

Selective Instruments of Credit Control

These instruments of monetary policy can be used in respect of any particular bank or in respect of a loan given against a particular security. Hence they are called selective instruments. The prominent amongst them are as follows:

a)    Regulation of credit margin

Whenever a commercial bank gives a loan against a tangible security, it maintains a margin between the value of the security and the amount of the loan given. This is necessary for maintaining safety of the bank. It also provides an instrument to the central bank to control the volume of credit given against a particular security.

Eg. A person tenders gold and applies for a loan. The market value of the gold is Rs; 10 lacs, and the credit margin prescribed by RBI is 20%. The commercial bank will be able to give a maximum amount of 8 lac against that security. If the margin is increased to 30% the commercial bank will have to reduce the loan to 7 lac.

This instrument is especially used for preventing cornering of stocks of essential raw materials.

b)    Direct Action

The central bank gives instructions to the commercial banks in respect of their lending policies. If a particular bank ignores the instructions RBI can take disciplinary actions against it. The action consists of charging a penal rate of interest to the offending bank, stopping lending to that bank or rejecting the bills offered by that bank for discounting. In any case the bank has to raise the rate charged to the customers which drives the customers away from that bank. Besides a disciplinary action taken by the central bank against a commercial bank creates an atmosphere in which the people avoid to go to that bank.

c)    Moral suasion

The central bank interacts with the commercial banks and urges them to adopt a particular credit policy. The commercial banks accept the policy suggested by the central bank because they have a respect for the central bank.

Moral suasion is better than direct action. It is preventive whereas direct action is curative. A frequent direct action taken by the central bank spoils the atmosphere between the central bank and the commercial banks. Hence as far as possible the central bank relies upon moral suasion.

d)    Consumer credit

The commercial banks advance loans to enable their customers to purchase durable costly consumer goods. The central bank can prescribe the rate of interest which they have to charge on these loans. It can also fix the installments in which the loans are to be recovered. If the rate of interest is raised and the number of installments is reduced it is difficult for the people to use them. The demand for the concerned consumer commodity falls.

e)    Publicity

The central bank of the country gives a wide publicity to its policy through its publications. The commercial banks accept that policy even when the central bank does not insist upon it. This method is also widely used by the central banks in developing countries.

Conclusion

In a developing country like India, the selective instruments are used more. They produce positive as well as negative effect. They directly bring about the desired change. They can be effective even if the country does not like a well organized money market and capital market.