Selective Credit Control Flashcards
What is Selective Credit Control?
Selective Credit Control is a monetary policy tool used by central banks to influence the flow of credit to specific economic sectors. This is done by imposing regulations that encourage or discourage lending to certain areas.
Provide two examples of how Selective Credit Control can be used in a positive direction.
Priority Sector Lending: Central banks can require banks to allocate a certain percentage of their loans to sectors considered important for development, such as agriculture or renewable energy.
Relaxing Credit Terms: During an economic downturn, central banks can relax down payment requirements or EMI rules on consumer durables to stimulate demand.
Describe the Credit Rationing System as an example of negative Selective Credit Control.
In a Credit Rationing System, the central bank sets limits on how much money banks can lend. It also may place restrictions on how much an individual or company can borrow in specific categories. This is done to curb lending in certain sectors.
Give a historical example of Selective Credit Control in India.
The Credit Authorization Scheme (CAS) in the 1960s required Indian banks to get prior approval from the RBI (Reserve Bank of India) before granting large loans (over ₹1 crore) to single borrowers. This aimed to control the concentration of credit.
Why did the RBI impose quantitative ceilings on non-food loans in the 1970s?
The RBI imposed these ceilings to combat food inflation and to encourage lending towards agricultural production, supporting the Green Revolution.
What is a common criticism of Selective Credit Controls?
A common criticism is that Selective Credit Controls can be difficult to enforce effectively. Banks and borrowers may find loopholes, and lax monitoring can undermine the intended effects of the policy.
Besides influencing the direction of credit, what other goal can Selective Credit Controls serve?
Selective Credit Controls can be used to discourage lending to speculative sectors that may be prone to creating asset bubbles, thereby promoting financial stability.
In a modern economy, why might Selective Credit Controls be less favored compared to other monetary policy tools?
Modern central banks often prefer broader tools like interest rate adjustments because they impact the overall cost of borrowing rather than targeting specific sectors. SCCs can be seen as less market-friendly and risk distorting credit allocation decisions.
