Explain Bank Rate Policy as a tool of Credit Control.

Bank Rate Policy is a quantitative method of credit control used by the central bank.

Meaning — The bank rate is the rate at which the central bank rediscounts the first class securities of commercial banks. It determines the market rate of interest at which commercial banks grant loans to borrowers.

How it controls credit:

1. To reduce credit — When the central bank wants to reduce credit in the market, it raises the bank rate. Borrowing from the central bank becomes more expensive, so commercial banks raise their own market rate of interest. This discourages borrowers from borrowing, and the volume of credit is reduced.

2. To expand credit — When the central bank wants to expand credit, it lowers the bank rate. Commercial banks then reduce their lending rates, encouraging borrowing and increasing credit.

Thus, by adjusting the bank rate, the central bank can directly influence the cost of credit and thereby the level of borrowing in the economy.