Which of the following is a qualitative or selective method of credit control by the central bank?
- Bank rate or Discount Rate Policy
- Open market operations
- Cash Reserve Ratio
- None of the above
Correct Answer: d. None of the above
Because none of the options (a) Bank rate policy or Discount Rate Policy, (b) Open market operations, and (c) Cash Reserve Ratio are qualitative or selective methods of credit control by the central bank, the correct answer is “None of the above”.
In order to regulate credit flow, qualitative or selective credit control methods are used to target specific sectors or borrowers. Instead of just influencing the availability of credit, these methods are used when the central bank wants to influence credit allocation.
For a central bank to stabilize and manage the economy, credit control is an essential function. To influence the money supply and credit availability in the economy, central banks use a wide range of monetary policy tools. There are two types of tools here: quantitative and qualitative.
Why the other options are not correct
a. Bank rate or Discount Rate Policy
It is the central bank’s responsibility to influence the general level of interest rates in the economy by setting the bank rate or discount rate policy as a key monetary policy tool. Commercial banks find it more expensive to borrow from the central bank when the central bank raises its bank rate.
Consequently, commercial banks raise their lending rates, resulting in higher interest rates for borrowers. A decrease in the bank rate lowers interest rates and encourages borrowing and spending
However, the bank rate policy is a quantitative measure because it affects all borrowers and credit providers uniformly. Rather than targeting specific areas of the economy, the central bank uses this tool to manage borrowing costs and inflation rather than targeting specific sectors or types of borrowers.
b. Open market operations
In open market operations, the central bank buys and sells government securities on the open market. Injecting money into the banking system via government securities increases the money supply.
In contrast, selling government securities reduces the money supply. By using this tool, the central bank can influence short-term interest rates and overall liquidity.
Similarly to the bank rate policy, open market operations are also a quantitative measure. Their impact is felt throughout the economy because they affect money supply and interest rates.
Despite its powerful ability to manage liquidity and stabilize financial markets, it doesn’t differentiate between specific sectors or borrowers.
c. Cash Reserve Ratio
Commercial banks must keep a certain percentage of their deposits in cash reserves with the central bank as part of their cash reserve ratio (CRR). If the central bank increases the CRR, it decreases the amount of money that banks can lend, thus controlling credit availability in the economy. Conversely, if the CRR decreases, more money can be lent.
However, like the previous options, the CRR is also a quantitative measure. It applies uniformly to all commercial banks and doesn’t distinguish between different sectors or borrowers.
Rather than selectively influencing credit flow, the CRR’s primary purpose is to manage liquidity and ensure the stability of the banking system.
In light of the explanations above, it is evident that none of the three options (a) Bank rate or Discount Rate Policy, (b) Open market operations, and (c) Cash Reserve Ratio are qualitative or selective credit control methods.
These options represent quantitative tools that impact the overall money supply and interest rates without targeting specific sectors or borrowers. By contrast, qualitative or selective credit control includes measures such as credit rationing, sector-specific credit ceilings, and margin requirements.
When the central bank wants to influence credit allocation rather than just credit availability, it uses these methods. The central bank can maintain financial stability by imposing credit limits or specific requirements on certain sectors or borrowers.
Hence, central banks control credit using a combination of quantitative and qualitative measures. While options (a) Bank rate or Discount Rate Policy, (b) Open market operations, and (c) Cash Reserve Ratio are essential tools for managing the overall money supply and interest rates, they do not qualify as qualitative or selective credit control measures. Accordingly, the correct answer is “None of the above,” since the options provided do not represent the specific methods used for targeted credit regulation.