What is meant by the central bank of a country? Explain in brief four methods usually adopted by the central bank to control credit in the country.

Central Bank — A Central Bank is a banking institution which controls the banking system in a country and carries out its monetary policy. Its main function is to control, regulate and stabilise the banking and monetary system of the country in the national interest. It controls supply of money and credit and serves as the lender of last resort. The Reserve Bank of India is the central bank of India.

Four Methods of Credit Control:

1. Bank Rate Policy — The bank rate is the rate at which the central bank rediscounts the first class securities of commercial banks. When the central bank wants to reduce credit, it raises the bank rate — central bank credit becomes expensive, so commercial banks raise their lending rates, discouraging borrowing. When it wants to expand credit, it lowers the bank rate.

2. Open Market Operations — These mean the sale and purchase of government securities by the central bank in the open market. To reduce credit, the central bank sells securities, which absorbs cash from the banking system. To expand credit, the central bank buys securities, which injects more money into the system. This is a more direct and effective method than bank rate.

3. Cash Reserve Ratio (CRR) — Commercial banks are required to keep a specified percentage of their cash reserves with the central bank. An increase in CRR reduces the credit-granting capacity of commercial banks (less money available to lend), while a decrease in CRR expands it.

4. Statutory Liquidity Ratio (SLR) — Commercial banks have to keep a certain percentage of their demand and time liabilities in liquid form (cash and government securities). When the central bank raises SLR, banks have to keep more liquid assets, reducing credit capacity. Lowering SLR expands credit.