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.

Definition

Simple definition

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

Expert views

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

Economic growth

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

Price stability

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

Quantitative 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

Eco. Growth

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.

Conclusion

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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