What are the methods adopted by the central bank to control credit?

The central bank uses two categories of methods to control credit: Quantitative methods (which affect the overall volume of credit) and Qualitative methods (which affect specific types of credit).

A. Quantitative Methods:

1. Bank Rate Policy — The rate at which the central bank rediscounts first class securities of commercial banks. Raising the bank rate makes credit costly and reduces lending; lowering it expands credit.

2. Open Market Operations — Sale and purchase of government securities by the central bank. Selling securities reduces credit (absorbs money); buying securities expands credit (injects money).

3. Cash Reserve Ratio (CRR) — Specified percentage of cash reserves that commercial banks must keep with the central bank. Raising CRR reduces lending capacity; lowering it expands lending capacity.

4. Statutory Liquidity Ratio (SLR) — Percentage of demand and time liabilities that banks must keep in liquid form (cash + government securities). Raising SLR contracts credit; lowering it expands credit.

B. Qualitative Methods:

5. Margin Requirements — The margin between the value of security and the loan granted against it. Raising margin requirements (e.g., from 70% to 60% of security value) reduces the volume of credit; lowering it expands credit. It is selective.

6. Credit Rationing — The central bank fixes a limit on the credit facilities available to commercial banks and rations the credit according to purpose. Used in exceptional situations of monetary stringency.

7. Moral Suasion — Informal, non-statutory method by which the central bank requests and persuades commercial banks not to grant credit for speculative or non-essential activities. Banks honour it out of respect for the central bank's authority.

8. Publicity — The central bank issues reports and review statements of assets and liabilities. These keep commercial banks aware of conditions in the money market, public finance, trade and industry, helping them adjust their credit activities accordingly.