Monday, February 9, 2009

Weapons of Credit Control (General methods)

1. Bank Rate Policy: Bank rate is the rate of interest which is charged by the central bank on rediscounting the first class bills of exchange and advancing loans against approved securities. This facility is provided to other banks. It is also known as Discount Rate Policy.

2. Open Market Operations: The term “Open Market Operations” in the wider sense means purchase or sale by a central bank of any kind of paper in which it deals, like government securities or any other public securities or trade bills etc. in practice, however the term is applied to purchase or sale of government securities, short-term as well as long-term, at the initiative of the central bank, as a deliberate credit policy.

3. Change in Reserve Ratios: Every commercial bank is required to deposit with the central bank a certain part of its total deposits. When the central bank wants to expand credit it decreases the reserve ratio as required for the commercial banks. And when the central bank wants to contract credit the reserve ratio requirement is increased.

4. Credit Rationing: Credit rationing means restrictions placed by the central bank on demands for accommodation made upon it during times of monetary stringency and declining gold reserves. This method of controlling credit can be justified only as a measure to meet exceptional emergencies because it is open to serious abuse.

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