Discriminatory: Selective controls unnecessarily restrict the freedom of borrowers and lenders. About the Author Rajat Sharma is a well known stock market analyst and commentator. There is contraction of credit which depresses the rise in price. Methods of Credit Control: The methods of credit control are also called the central banking techniques. On the other hand, a fall in the bank rate lowers the market rates, and the value of capital assets increases.
. Consumer Credit Regulation Under this method, consumer credit supply is regulated through hire-purchase and installment sale of consumer goods. Moreover, the demand for consumer credit in the case of durable consumer goods is interest inelastic. A fall in the total cash reserves is leads to a cut in the credit creation power of the commercial banks. It may also charge a penal rate of interest from those banks which want to borrow from it beyond the prescribed limit.
When the Central Bank considers increasing the credit, it will lower the cash reserve ratio. An increase in this proportion reduces the amount of money available for commercial banks to lend while a reduction has the opposite effect. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards. But the banks keep with them large amounts of liquid assets and do not find it necessary to approach the central bank for financial help. It is not possible to verify empirically these two views.
Â§ Assist in developing and implementing a Direct Debit payment system. It is essential to regulate consumer expenditure on such durable goods to control inflations. This method affects only persons with limited incomes and leaves out higher income groups. Thus with the increase in the cost of borrowing funds, there will be a disincentive for investors and business firms to borrow from the commercial banks. Before publishing your Articles on this site, please read the following pages: 1. The central bank controls credit by making variations in the bank rate.
These tools are not directed towards the quality of credit or the use of the credit. But, since the central bank is the leader of the money market and the lender of the last resort, al other rates are closely related to the bank rate. Publicity is another method, whereby the Reserve Bank marks direct appeal to the public and publishes data which will have sobering effect on other banks and the commercial circles. Conclusion: The above points have led the majority of economists to conclude that the power to alter the bank rate is an extremely weak weapon of monetary management. Another aspect of the open market policy is that when the supply of money changes as a result of open market operations, the market rates of interest also change. The difference between the repurchase price and the original sale price will be the cost for the borrower. Similarly, this rate is also used to stabilize Exchange Rate of Rupee.
The following instruments are used to conduct monetary policy in Kenya: These days, the most important function of a central bank is … to control the volume of credit for bringing about stability in the general price level and accomplishing various other socio economic objectives. But it may not regain its order importance. Credit or loan is the act of giving money, property or other material go od s to an ot he r pa rt y in ex ch an ge fo r fu tu re re pa ym en t of th e principal amount along with interest or other finance charges. This is another way of exerting moral pressure on the commercial bank. If the margin is fixed as 30%, the commercial banks can lend up to 70% of the market value of security. This policy may not be used against all banks but against erring banks. In recent years, the bill of exchange as an instrument of financing commerce and trade has fallen into disuse.
The lowering of the reserve ratios has the opposite effect. So the bank rate policy cannot be a success in a rigid society. This will help in checking inflationny rate in the economy. This is because it lacks definiteness in the sense that it is inexact and uncertain as regards changes not only in the amounts of reserves but also the place where these changes can be made effective. Consumers are motivated to buy such goods under the influence of the demonstration effect and the rate of interest has little consideration for them. In India, 'Repos' are normally conducted for a period of 3 days.
They usually aren't too expensive, but on the other hand it depends on the vehicle and the parts distributor. Thus open market operation is one of the superior instrument of credit control. The papers ordered and produced should be used as a guide or framework for your own paper. If the Bank Rate is high, the market rate cannot remain low. If the bank rate is changed all the other rates normally change at the same direction.
They are, in fact, the percentage of the value of the security that cannot be borrowed or lent. Suppose a bicycle costs Rs 500 and credit is available from the commercial bank for its purchase. For the purpose of this study inflation is defined according to Ben Chukwuemeka Anibueze Banking Practice volume three as a sustained rise in the general level of prices of most goods and services that is to say that there is always and increase in price without inflation. These methods regulate the lending ability of the financial sector of the whole economy and do not discriminate among the various sectors of the economy. Even though there is an increase in their cash reserves, they may not expand the credit for want of credit-worthy borrowers. Variations of reserve requirements affect the liquidity position of the banks and hence their ability to lend.