Credit control policy or Monetary policy may be defined as "that branch of economic policy which is concerned with the regulation of the availability or supply, the costs and the directions of credit."
OBJECTIVES or GOALS
The objectives of credit control of monetary policy have been different at different times in different countries according to the economic situations and problems faced by them. In the modern times economic development with monetary stability is accepted as the most important goal of credit control.
The main objective of this credit-control function is to save economy from inflation and deflation and to stabilize the economy and prices.
METHODS OF CREDIT CONTROL
Credit control is one of the most important responsibility of a central bank. Central bank of a country can control credit by following two methods.
(1) Qualitative controls (2) Quantitative controls
Quantitative controls are used to expand or contract the total quantity (overall size) of credit. These controls are of the following kinds:
1. Bank rate policy
2. Open market operations .
3. Variable reserve ratios
4. Liquidity ratio
5. Credit rationing
These are explained as under.
i. Bank Rate (or Discount Rate) Policy
Bank rate is the rate at which central bank rediscounts bill of exchange or provides credit to commercial banks. For controlling credit central bank may increase or decrease bank rate. When bank rate is raised, other bank's interest rates on advances also move up. When bank rate is decreased, other banks' interest rates on advances also go down. Borrowing from banks is discouraged or encouraged and, as a result, the rate of monetary expansion decreases or increases.
2. Open Market Operation
Buying and selling of government securities by the central bank with a view to influencing money supply is called open market operations. When...