objectives and methods of credit control

Write the objectives and methods of credit control?

Contents

Objectives of Credit Control

Credit control has the following objectives:

1. Economic Stability and Full Employment – Credit is controlled to avoid fluctuations of the economy and the situation of full employment should always be there.

2. To Establish Stability in the Internal Prices – The main function of a central bank is to control the instability of an internal prices. If the quantity of credit in any country is less then its trade requirements, then the price-level will fall and if it is exceeding, then the price level will increase. Therefore it is essential to remain stability in the price level.

3. To Establish Stability in the Exchange Rates – If there is instability in the foreign exchange, then the international trade is adversely affected. Therefore the main objective of the credit control is to bring stability in foreign exchange rates.

4. To Establish Control over Trade Cycle – In most of capitalistic countries, trade cycles are the cause of their economic instability, and the economy is adversely affected. Central Bank tries to remove the effects of these trade cycles on the economy with its credit control. By increasing or reducing the quantity of credit, trade cycles are controlled.

5. Success in Economic Planning – When country lacks in finance, then its economic development of the country and to overcome the financial shortage.

6. War Preparation – Now days, modern wars have become so expensive that its burden becomes unbearable for any economy. Therefore, a central bank with its credit expansion tries to manage the economic system.

Methods of Credit Control

Methods of credit control are divided into two parts:

1. Quantitative Methods

Bank Rate
Open Market Operations
Reserve Ratio Requirements
Liquidity Ratio Reserve

2. Qualitative Methods

Selective Credit Control
Rationing of Credit
Publicity
Moral Suasion
Direct Action

Quantitative Methods-

Quantitative method involves the following:

(a) Bank Rate or Discounting Rate – Bank rate is the rate at which a central bank is prepared to rediscount first class bills, or to advance loans on approved securities. A change in central bank rate is effected by the interest rate. If the central bank increases its rate then the interest rates also increases and the granting of loan becomes expensive. It starts contraction in an economy. On the contrary to it if the Central Bank rate is declined, then the interest rate also decreases and granting of loans becomes cheaper. Credit starts expanding in an economy. So, there is a direct relation between bank rate and interest rate.