Instruments of Credit Control

Instruments of credit control are tools used by the central bank to regulate the availability and cost of credit in the economy. They are used to control inflation, promote economic growth, and maintain financial stability.

The main instruments of credit control are:

  • Statutory Liquidity Ratio (SLR): This is the minimum percentage of their total deposits that commercial banks have to hold in cash or liquid assets (such as government bonds) with the central bank. By increasing or decreasing the SLR, the central bank can control the amount of money that banks have available to lend.
  • Cash Reserve Ratio (CRR): This is the minimum percentage of their daily net demand and time liabilities that commercial banks have to keep in cash with the central bank. By increasing or decreasing the CRR, the central bank can control the amount of money that banks have available to lend.
  • Bank Rate Policy: This is the interest rate at which the central bank lends money to commercial banks. By raising or lowering the bank rate, the central bank can influence the interest rates that commercial banks charge their customers.
  • Open Market Operations (OMOs): This is the buying and selling of government securities by the central bank in the open market. By buying securities, the central bank injects money into the economy, and by selling securities, the central bank withdraws money from the economy.
  • Selective Credit Control (SCC): This is a set of measures used by the central bank to control the flow of credit to specific sectors of the economy. For example, the central bank may impose higher interest rates on loans for consumer durables or impose restrictions on the amount of credit that can be extended to real estate developers.

MCQs on Instruments of Credit Control

  1. Which of the following is not an instrument of credit control?
    • Statutory Liquidity Ratio (SLR)
    • Cash Reserve Ratio (CRR)
    • Bank Rate Policy
    • Open Market Operations (OMOs)
    • Selective Credit Control (SCC)
    • The answer is Selective Credit Control (SCC).
  2. When the central bank increases the SLR, what happens to the amount of money that banks have available to lend?
    • It decreases.
    • It increases.
    • It remains the same.
    • It cannot be determined.
    • The answer is It decreases.
  3. When the central bank raises the bank rate, what happens to the interest rates that commercial banks charge their customers?
    • They decrease.
    • They increase.
    • They remain the same.
    • It cannot be determined.
    • The answer is They increase.
  4. Which of the following is a measure of selective credit control?
    • Increasing the SLR
    • Raising the bank rate Selling government securities in the open market
    • Imposing higher interest rates on loans for consumer durables
    • The answer is Imposing higher interest rates on loans for consumer durables.
  5. The central bank uses credit control measures to achieve which of the following goals?
    • Control inflation
    • Promote economic growth
    • Maintain financial stability
    • All of the above
    • The answer is All of the above.