Quantitative and Qualitative Credit Control methods

Monetary policy aims to achieve accelerated growth with price stability. Implementation of monetary policy is one of the major roles of central banks.  The central banks world over achieve these objectives through two types of credit controls techniques; quantitative or general credit control method and qualitative or selective credit control methods. Let us examine the methods adopted by the Reserve Bank of India (RBI) as part of monetary policies.

Quantitative or General Credit Control Methods

The quantitative or general credit control methods adopted by the RBI directly influence the total volume of credit in the economy and also the cost of credit ( rate of interest). The instruments available with the RBI for this method are

i.      Repo Rate
ii.     Reverse Repo Rate
iii.    Bank Rate or Discount Rate (BR)
iv.    Cash Reserve Ratio (CRR)
v.     Statutory Liquidity Ratio (SLR)
vi.    Open Market Operations (OMO)
vii.    Marginal Standing Facility (MSF)

viii.  Long Term Repo Operation (LTRO)

ix.    Targeted Long Term Repo Operation (TLTRO)

A change in policy rates gets reflected in the short term money market rates ( such as call money rate, certificate of deposits, commercial papers, treasury bills etc) followed by changes in forex market and equity market. The yields on medium and long term government and corporate bonds also undergo changes. However, the envisaged changes get reflected only if adequate competition exists among banks and lending rates off banks strictly follow the policy rates. Though the changes in policy rates gets reflected in market over a period of time, the rate transmission has not been happening in the way that the RBI wanted.

Making banks to follow various interest rates over a period for lending,  like Prime Lending Rate (PLR), Bench Mark Prime Lending Rate (BPLR), Base Rate (BR), Marginal Cost of funds based Lending Rate (MCLR) were attempts by RBI to ensure transmission of policy rate to market. RBI has now proposed   to link interest rate to External Benchmark. .

Qualitative or Selective Credit Control Methods

The qualitative or selective credit control techniques are employed by the RBI to control the direction and use of credit rather than the volume of credit. Through these qualitative measures, the RBI encourages the use of credit for more desirable purposes by restricting the use of credit in undesirable ways. The selective credit control methods employed by the RBI include:

i.     Variation in margin requirements
ii.    Regulation of consumer credit
iii.   Direct action
iv.    Moral suasion
v.    Credit rationing
vi.   Publicity

Both quantitative and qualitative credit controls have their own merits and demerits.  Both are crucial in the economy for fostering economic stability and price stability. Effective and efficient application of these methods controls economic evils like inflation and deflation. It is proven over a period of time that co-ordinated use of general and selective controls yield better result than independent use of any of them.