Write brief notes on Selective and Quantitative methods of credit control as followed by banks

1. Selective Credit Control Measures:

These measures are also known as qualitative credit control, though they have also their quantitative impact. By their very nature, these measures are directed at regulating selective segments of the economy. An underdeveloped economy like ours suffers from several rigidities. It does not have a developed market mechanism. It lacks flexibility and ability to adjust quickly and evenly. Some parts of it can suffer from inflationary pressures while others may be suffering from a shortage of demand. There can be inter-sectoral and inter-regional imbalances. It is, therefore, necessary that in such an economy, the central bank should adopt selective regulatory measures so as to encourage or restrict specific categories of economic activities. These measures aim at influencing the allocation of resources.

Selective credit control is exercised through issuing specific instructions to the banks. They can be discriminatory as between banks, between borrowers between purposes for which credit is extended and so on. In some cases, the instructions may also cover some additional dimensions of the credit like its maturity and terms and conditions. The central bank may also prescribe credit rationing, that is, absolute limits up to which specified sectors of the economy may be entitled to get credit from the banking system. It need not be emphasized that a developing economy not only needs selective credit control, it is also more effective and useful for it.

2. General or Quantitative Credit Control Measures:

These measures are non-discriminatory as between banks and as between the uses to which credit may be given. They aim at regulating only the aggregate volume of money and credit available to the economy. They do not distinguish between the purposes for which borrowers use the loans, or the type of borrowers who are getting the loans. These measures are used on the assumption that there is a free market mechanism in the economy. By implication, any expansion (or contraction) of money supply is expected to spread itself quickly and evenly throughout the economy. The availability or scarcity of credit is experienced throughout the economy and does not remain confined to any segment of it. Therefore, the authorities need not worry about the part of the economy in which they inject additional credit supply, or from which they drain it. It also follows that any effort to selectively influence some parts of the economy is bound to be frustrated. The effect is felt by the entire economy or not at all.