How does the central bank use the SLR and credit rationing to exercise credit control in a country?

1. Statutory Liquidity Ratio (SLR) — SLR is a quantitative method of credit control. Commercial banks are required by law to keep a certain percentage of their demand and time liabilities in liquid form, consisting of cash and government securities.

How SLR controls credit:

• To reduce credit — When the central bank wants to reduce the volume of credit, it raises the SLR. As a result, commercial banks have to keep a larger portion of their funds in liquid assets, leaving less money available for lending. Their credit-granting capacity is reduced, which controls inflation.

• To expand credit — When the central bank wants to expand credit, it lowers the SLR. Banks can then keep a smaller portion in liquid form and have more funds available for lending, which boosts credit and economic activity.

2. Credit Rationing — Credit rationing is a qualitative (selective) method of credit control. Under this method, the central bank fixes a limit on the credit facilities available to commercial banks. The available credit is rationed among them according to the purpose of credit — priority sectors and essential industries get more, while non-essential and speculative purposes get less.

How Credit Rationing controls credit:

• It ensures that available credit flows to the most productive and essential uses (e.g., agriculture, small industries, exports) rather than to speculative or non-essential activities.

• It is used in exceptional situations of monetary stringency, such as during a serious shortage of credit or economic crisis.

• It is generally used to contract credit (cannot ordinarily be used for credit expansion).

By combining SLR and credit rationing — quantitative and qualitative tools — the central bank can both control the volume of credit and direct it into the right channels, thereby achieving stability in prices, exchange rate and economic growth.