Role of Central Bank as the Controller of Credit
Role of Central Bank
The central bank is responsible for regulation and control of monetary system. Because its first priority to increasing in public interest, for this central bank developed policies for control the supply and credit money in the market, such policy called Monetary policy.
Monetary policy refers to the measures which the central bank of a country takes in controlling the money and credit supply in a country, with a view to achieving certain specific ec n mic objectives
According to S.A. Meenai
Monetary policy is the regulation of the cost and availability of money and credit in the economy
According to H.W.Arudt
Monetary policy is that branch of economic policy, which is concerned, with regulation of the supply, the cost and the direction of credit
According to H.G. Jhonson
It is a policy f central bank in control the supply of money with the aim of achieving macro economic stability
Objective of monetary Policy Control on inflation and deflation
Central bank generates economic stability by controlling inflation and deflation in a country, through monetary policy
A good policy of credit control ensures economic growth. The decisions regarding sanction of credit to deferent sectors of the economy greatly affect the rate of economic growth.
Increase in investment
State bank give the instructions to commercial banks provides loan to productive sectors, with the help of it industry promote and as well as employment also increased
Increase in exports
With the help of monetary policy the commercial bank issued loan to exporters of the countries. And due to this facility country get foreign currency, and economic growth automatically enhanced
The economic growth depends on stable price level. For this central bank fixing the credit limit for the commercial bank, then supply of money is controlled. Due to this effect industries contr l the price level till it become stable
Stable in money market
The central bank must keep stable money mark t. The demand and supply of credit must be adjusted in the b st of interest of the country.
Method of monetary policy
Quantitative Control Qualitative Control
1. Bank reserve rate policy
Bank reserve rate means the rate that is deposited by commercial bank to central bank
a. In case of inflation
When there is inflation on the country, then central bank for the purpose of control over the inflation increase the Reserve rate of commercial bank, then supply of money control automatically as well as inflation becoming control.
b. In case of deflation
In case of deflation central bank decreased the reserve rate due to this supply of money increased and price is also increased and at the end deflation decreased
2. Open market operation
Its mean sale and purchase of Govt. securities in the open market by the state bank of Pakistan. If the inflation condition exit then central bank sells the govt securities to general public and in case of deflation central bank purchase the govt securities from open market.
3. Credit limits
The central bank controls the credit supply with the help of fixing the credit. After t supplies of money control as well as inflation also controlled.
4. Discount rate policy
Discount means when the central bank discounting the bills of exchange of banks. In case of inflation central bank increase the discount rate and vice versa
2. Qualitative Control
1. Consumer credit control
The central bank can increase or decrease number of installments payable under installment sale agreement. Sometimes the grant o credit for consumer goods on installment basis is completely banned by central bank.
2 Marginal Requirements
Margin means the difference between the amount of loans and value of security. The minimum margin requirement on securities may be relaxed o encourage the borrowing and can be imposed to discourage the borrowing.
3. Direct Action
When commercial bank fails to follow credit policy of central bank, direct action may be taken against defaulter bank. By following action.
Does’t provide the facility of clearing house Increase the reserve ratio of case :
Reuse to discount the bills of exchange
Declares the scheduled banks as non-schedule bank and takes the facility back.
4 Moral persuasions
The central bank can use this method of moral persuasion as leader of commercial bank. It regularly advises and guides commercial banks to follows a particular policy for loans.
Limitations of monetary policy
1. Co-operation of banks
It is very difficult for c ntral bank to control to credit, if commercial banks do ot extend their full co-operation
2. Conflicting objectives
The greatest difficu ty in controlling credit is the simultaneous, achievement of conflicting objectives of price stabi ity, economic stability etc.
3. Conventional techniques
In under developed countries like Pakistan the conventional techniques of credit control namely bank rate policy open market and reserve ratio are not all powerful.
4. Existence of non-monetized sector
In underdeveloped counties there exists a large non-monetized and rural subsistence sector. Thus a bi sector of community is quiet unaffected by the monetary policy
5. Deficit financing
A large scale of deficit financing by govt may make the central bank powerless in controlling the credit which cause inflationary pressure in he country.
As we study in above question about policies. But all these policies are affective when these are implemented by the Govt. of Pakistan. Inflation stage required 5 to 10 years to convert in equilibrium position. That is not possible during the daily changing in presented and other member of Govt. so these policies only for the reading not for implementing.
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