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BANKING AND MONETARY POLICY — Economics STD 12 Commerce — Question

Gujarat BoardEnglish MediumSTD 12 CommerceEconomicsBANKING AND MONETARY POLICY5 Marks
Question
Explain the qualitative measures of monetary policy/credit control.
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Answer

Selective/Qualitative measures of monetary policy/ Credit control:
  • Qualitative measures are those measures which are selected by $\text{RBI}$ based on the impact of credit for development of certain sectors or segments of the economy.
  • These measures have unique impact on certain sector and unlike quantitative measures do not impact all sectors present of the economy.
$1.$ Collateral security:
When bank lends money to individual, it demands some asset as mortgage for security of the loan. This is known as collateral security.
  • This security can be jewelry, fixed deposits, car, house, land, etc.
  • The bank asks for such assets against the loan because if the borrower is not able to pay back the loan amount, bank uses this asset to recover the dues.
  • The type of security that the bank demands various from person to person. For example, a poor farmer may get a loan from bank with almost no or less security whereas, a rich businessman may have to keep more as security with the bank to get loan.
  • $\text{RBI}$ promotes and encourages commercial banks to take such steps so that all the segments of people in India can attain the benefit of bank credit.
$2.$ Margin requirement:
  • Margin requirement is the limit that is set by $\text{RBI}$ for granting loans against security.
  • An individual is offered only certain percentage of the total value of the asset $($security$)$ as loan.
$3.$ Ceiling on credit:
  • $\text{RBI}$ fixes a limit on the loans that the commercial banks can give to the people.
  • In other words, commercial banks cannot exceed the maximum limit $($ceiling$)$ that the $\text{RBI}$ has fixed for specific categories.
$4.$ Discriminatory interest rates:
  • Banks charges different rate of interest on different types of loans and advances and also charges differently to different economic class of people.
  • For example, the bank may charge less interest rate on the loan given to a farmer for agricultural development and may charge more interest rate on the loan given to a businessman.

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