Credit Control: Meaning and Objectives

Credit control means the regulation of the volume (how much) and the direction (where it goes) of bank credit by the central bank, so as to achieve the broad economic goals of the country.

Commercial banks create credit (loans) many times their cash reserves. If credit expands too much, it can cause inflation (a general rise in prices); if it contracts too much, it can cause deflation, unemployment, and a slowdown. The RBI therefore controls credit to keep the economy on an even keel.

Objectives of credit control:

1. Price stability — to prevent both excessive inflation and deflation, keeping the value of money reasonably stable.
2. Economic stability — to smooth out the ups and downs (booms and depressions) of business activity.
3. Stability of the exchange rate — to keep the external value of the rupee steady.
4. Promotion of economic growth — to channel adequate credit toward productive and priority sectors such as agriculture, small industry, and exports.
5. Control of speculation and hoarding — to discourage the misuse of bank credit for speculative dealing in commodities or shares.

Two broad kinds of methods. The RBI controls credit using two families of tools, which the next two sections take up in turn:

• Quantitative (general) methods — affect the total amount of credit in the economy, without targeting any particular use. These are the bank rate, open market operations, and the cash reserve ratio (along with related tools). …