Selective credit controls are a monetary policy tool used by central banks to influence the allocation of credit in the economy. They are used to encourage or discourage lending to certain sectors of the economy, such as agriculture, housing, or small businesses.
Selective credit controls can be used to achieve a variety of policy goals, such as:
- Promoting economic growth by encouraging lending to priority sectors
- Reducing inflation by discouraging lending for speculative purposes
- Managing the balance of payments by discouraging lending for imports
There are a variety of selective credit controls that can be used, such as:
- Loan interest rates: The central bank can set different interest rates for different types of loans. For example, the central bank may set a lower interest rate for loans to small businesses than for loans to large businesses.
- Lending limits: The central bank can set limits on the amount of credit that banks can lend to certain sectors of the economy. For example, the central bank may set a limit on the amount of credit that banks can lend to real estate developers.
- Collateral requirements: The central bank can require banks to hold collateral for certain types of loans. For example, the central bank may require banks to hold government securities as collateral for loans to small businesses.
- Direct controls: The central bank can directly control the allocation of credit by issuing directives to banks. For example, the central bank may direct banks to increase lending to small businesses.
Selective credit controls can be a powerful tool for influencing the allocation of credit in the economy. However, they can also be difficult to implement and enforce. Additionally, selective credit controls can distort the market and lead to unintended consequences.
Here are some multiple choice questions on selective credit controls:
- Which of the following is NOT a selective credit control?
- Loan interest rates
- Lending limits
- Collateral requirements
- Direct controls
- Moral suasion
The answer is moral suasion. Moral suasion is a non-binding instrument of monetary policy that relies on persuasion and moral pressure. It is not a selective credit control.
- Which of the following is the most common selective credit control?
- Loan interest rates
- Lending limits
- Collateral requirements
- Direct controls
The answer is loan interest rates. Loan interest rates are the most common selective credit control because they are easy to implement and control.
- What are the advantages of selective credit controls?
- They can be used to promote economic growth by encouraging lending to priority sectors.
- They can be used to reduce inflation by discouraging lending for speculative purposes.
- They can be used to manage the balance of payments by discouraging lending for imports.
The answers are all of the above. Selective credit controls can be used to achieve a variety of policy goals, such as promoting economic growth, reducing inflation, and managing the balance of payments.