Selective credit controls

Selective credit controls:

Selective credit controls can play a significant role in an under-developed money market with a deliberate economy. Unlike the tools of quantitative credit control, the discerning instruments affect the kinds of credit extended by the commercial banks. They not only save flow of credit into undesirable channels, however also direct the flow of credit into helpful channels.

The weapons of selective credit controls comprise:

(A) Fixing the minimum margin of lending or for purchase of securities. (For illustration, shares or commodities such as food-grains and raw materials that are in short supply). In this situation, the central bank identifies the fraction of the purchase price of securities which must be paid in cash. Dissimilar general controls, selective controls make it possible for central bank to restrain what is considered as an unhealthy expansion of credit. (Example, for financing the buy of securities or automobiles);

(B) Ceiling on the amount of credit for development and

(C) Different rates of interest will be charged to persuade certain sectors and to discourage certain other sectors. The weapon has been employed especially, to encourage exports, agricultural production and production in small scale industries sector.

(D) The central bank will influence the commercial banks to follow some policies via moral suasion.

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