CREDIT CONTROL - Difference Between Qualitative and Quantitative Methods of Credit Control

CREDIT CONTROL
Central banks are the Controller of credit system in the country. It seeks to regulate the credit system in such a way as to encourage genuine and desirable economic activities and discourage reckless expansion of unproductive and undesirable credits. Fluctuations in the volume of credit, course fluctuates purchasing power of money, this fact has far-reaching economic and social consequences. That is why credit Cantrol has become important function of any Central Bank.

According to Professor Richard Lipsy

“The one true, but at the same time, all suffering Function of a Central bank is control of credit.”

OBJECTIVES OF CREDIT CONTROL

When the Central Bank sets out control, the expansion and contraction of the volume of money, its objectives may be narrow in scope or they may be comprehensive.

• STABILITY OF INTERNAL – PRICE LEVEL The Commercial Bank creates credit because their main task is borrowing and leading. They create credit without any increase of cash with them. The Central Bank applied its credit control to bring out measure requirement of credit in the country. This will help in keeping the price stable.

• STABILITY IN THE EXCHANGE RATES This is also an important object of credit control. Credit control measures certainly influence the price level in the country. The internal price level affects the volume of exports and imports of the country, which may bring fluctuations in the foreign exchange rates. While using any measure of the credit control it should be ensured that there would be no violent fluctuations in the exchange rates.

METHODS OF CREDIT CONTROL 
The central bank adopts two types of method for credit control. These are

1) Quantitative method 
2) Qualitative method 

QUANTITATIVE METHOD
These methods are much more effective. These methods aim is to control the cost and quantity of credit by adopting techniques. These techniques are:


• OPEN MARKET OPERATION TECHNIQUE
Open market operation refers to the purchase and sale by central bank of variety of assets of the government such as foreign exchange, government securities, gold, trade bills etc. It is effective up to some extent in both conditions of inflation and deflation. When the central bank fund growing inflationary trend in the economy, it sell securities to the peoples through commercial bank, So, when customer purchase the securities they will pay to the commercial bank and commercial bank pay that money or cheques to the central bank So, the supply of money decreased. In case of deflation central bank can raise the supply of money and credit by purchasing securities, Securities are purchased from the peoples and money retuned to them. Thus, increasing the quantity of money in the economy and the supply of money increased.

• BANK RATE POLICY TECHNIQUE 
“Bank rate is the official minimum rate of discount at which central bank discount approved bill of exchange and provides loans for short term on securities of approved nature.” So Bank rate is a rate of at which commercial bank can get accommodation from central bank in the form of rediscounting of the eligible bills or loans against securities When there is inflation, central bank raise the bank rate, loans and discounting of bill become more costly, therefore commercial banks also increase the interest rate on advances. When loans become costly peoples avoid to taking loans and prefer to deposit in the bank to earn high profit so, the supply of money decreased When there is deflation, the bank rate lowered and the discounting of bills become less costly. Therefore commercial banks also fall the interest rate on advances. When loans becomes less costly peoples taking loans and investing in the business so, the supply of money increased.

• VARIATION IN RESERVE RATIO
According to Keynes.

“The most effective tool in the hands of central bank to control credit is the variation in reserve ratio.”

The member banks of central bank are required to keep certain percentages of their deposits with the central bank. The central bank possesses other tools of credit control in the form of power to vary these reserves raptio according economy condition.

If there is inflation, then the percentage of reserve ratio increased the capacity of commercial bank to create credit decreases resulting in high interest rate and discourages borrowing. If there are deflation, the reserve ration decreases and the capital of commercial bank to create credit increases resulting in low interest rate and encourage borrowing.

• • OBJECTIVE OF CASH RESERVE RATE
a) For credit control. 
b) Act as a security for proper functioning of commercial banks. 
c) These reserves help in case of insolvency 
d) It is necessary to get listed or schedule.


• CREDIT CEILING “The central bank fixes the optimum limit of the extension of credit to control the volume if credit.” By increasing or decreasing the upper limit of the loans available to commercial banks directly affects the volume of credit money. In case of inflation, the optimum or the upper limit decreases by the central bank to check credit. In case of deflation the optimum limit increases by the central bank to create credit.

QUALITATIVE METHOD
The central bank under certain conditions adopts the qualitative or selective method; these relate to the distribution or direction of available credit supplies. Its aim is to discourage uneventful and undesirable activities. Its special features are

1) It is very flexible. 
2) It is common and generally prevailed. 
3) Effective under ineffective money market. 
4) Effective for developing economics.

• REGULATION OF CONSUMER CREDIT The credit advanced by commercial banks or purchasing durable goods may be controlled by a central bank with a view to controlling credit. Consumer credit can be control by regulating the terms and conditions of repaying the credit in installment, the number of installments or period of repayment.

• MORAL PERSUASION It is a method through which central bank may prohibit or dissuade commercial banks to deal in speculative business.

• DIRECT ACTION If commercial banks persist in pursuing a policy, which conflicts with the declared policy of the central bank the latter, may be compelled to take direct action against the commercial banks. The central bank either refuses to rediscount to that bank. In practice this method is not found effective satisfactory. 

• RATIONING OF CREDIT Central bank may adopt necessary legislation for credit control. For example the central bank places some discriminatory terms and condition in respect of credit given by the commercial bank. 

• PUBLICITY AND INFORMATION It means issuing of weakly and other periodical, statistics and reviews of many market conditions, trade and industry. In addition the central bank may convince the borrowers and lenders through publications to create a specific credit policy as framed by it keeping in view the rotational interest.
• CONCLUSION The above-discussed methods play a vital role in the credit control. The coordination of quantitative and qualitative method appears to have been more effective has use of anyone of them especially in an economy like Pakistan

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