(A) Quantitative Instruments or General Tools ↓

The Quantitative Instruments are also known as the General Tools of

monetary policy. These tools are related to the Quantity or Volume of the
money. The Quantitative Tools of credit control are also called as General
Tools for credit control. They are designed to regulate or control the total
volume of bank credit in the economy. These tools are indirect in nature and
are employed for influencing the quantity of credit in the country. The general
tool of credit control comprises of following instruments.

1. Bank Rate Policy (BRP)

The Bank Rate Policy (BRP) is a very important technique used in the
monetary policy for influencing the volume or the quantity of the credit in a
country. The bank rate refers to rate at which the central bank (i.e RBI)
rediscounts bills and prepares of commercial banks or provides advance to
commercial banks against approved securities. It is "the standard rate at
which the bank is prepared to buy or rediscount bills of exchange or other
commercial paper eligible for purchase under the RBI Act". The Bank Rate
affects the actual availability and the cost of the credit. Any change in the
bank rate necessarily brings out a resultant change in the cost of credit
available to commercial banks. If the RBI increases the bank rate than it
reduce the volume of commercial banks borrowing from the RBI. It deters
banks from further credit expansion as it becomes a more costly affair. Even
with increased bank rate the actual interest rates for a short term lending go
up checking the credit expansion. On the other hand, if the RBI reduces the
bank rate, borrowing for commercial banks will be easy and cheaper. This will
boost the credit creation. Thus any change in the bank rate is normally
associated with the resulting changes in the lending rate and in the market
rate of interest. However, the efficiency of the bank rate as a tool of monetary
policy depends on existing banking network, interest elasticity of investment
demand, size and strength of the money market, international flow of funds,
etc.
2. Open Market Operation (OMO)

The open market operation refers to the purchase and/or sale of short term
and long term securities by the RBI in the open market. This is very effective
and popular instrument of the monetary policy. The OMO is used to wipe out
shortage of money in the money market, to influence the term and structure of
the interest rate and to stabilize the market for government securities, etc. It is
important to understand the working of the OMO. If the RBI sells securities in
an open market, commercial banks and private individuals buy it. This
reduces the existing money supply as money gets transferred from
commercial banks to the RBI. Contrary to this when the RBI buys the
securities from commercial banks in the open market, commercial banks sell it
and get back the money they had invested in them. Obviously the stock of
money in the economy increases. This way when the RBI enters in the OMO
transactions, the actual stock of money gets changed. Normally during the
inflation period in order to reduce the purchasing power, the RBI sells
securities and during the recession or depression phase she buys securities
and makes more money available in the economy through the banking
system. Thus under OMO there is continuous buying and selling of securities
taking place leading to changes in the availability of credit in an economy.

However there are certain limitations that affect OMO viz; underdeveloped
securities market, excess reserves with commercial banks, indebtedness of
commercial banks, etc.

3. Variation in the Reserve Ratios (VRR)

The Commercial Banks have to keep a certain proportion of their total assets
in the form of Cash Reserves. Some part of these cash reserves are their total
assets in the form of cash. Apart of these cash reserves are also to be kept
with the RBI for the purpose of maintaining liquidity and controlling credit in an
economy. These reserve ratios are named as Cash Reserve Ratio (CRR) and
a Statutory Liquidity Ratio (SLR). The CRR refers to some percentage of
commercial bank's net demand and time liabilities which commercial banks
have to maintain with the central bank and SLR refers to some percent of
reserves to be maintained in the form of gold or foreign securities. In India the
CRR by law remains in between 3-15 percent while the SLR remains in
between 25-40 percent of bank reserves. Any change in the VRR (i.e. CRR +
SLR) brings out a change in commercial banks reserves positions. Thus by
varying VRR commercial banks lending capacity can be affected. Changes in
the VRR helps in bringing changes in the cash reserves of commercial banks
and thus it can affect the banks credit creation multiplier. RBI increases VRR
during the inflation to reduce the purchasing power and credit creation. But
during the recession or depression it lowers the VRR making more cash
reserves available for credit expansion.

(B) Qualitative Instruments or Selective Tools ↓

The Qualitative Instruments are also known as the Selective Tools of

monetary policy. These tools are not directed towards the quality of credit or
the use of the credit. They are used for discriminating between different uses
of credit. It can be discrimination favoring export over import or essential over
non-essential credit supply. This method can have influence over the lender
and borrower of the credit. The Selective Tools of credit control comprises of
following instruments.

1. Fixing Margin Requirements

The margin refers to the "proportion of the loan amount which is not financed
by the bank". Or in other words, it is that part of a loan which a borrower has
to raise in order to get finance for his purpose. A change in a margin implies a
change in the loan size. This method is used to encourage credit supply for
the needy sector and discourage it for other non-necessary sectors. This can
be done by increasing margin for the non-necessary sectors and by reducing
it for other needy sectors. Example:- If the RBI feels that more credit supply
should be allocated to agriculture sector, then it will reduce the margin and
even 85-90 percent loan can be given.
2. Consumer Credit Regulation

Under this method, consumer credit supply is regulated through hire-purchase

and installment sale of consumer goods. Under this method the down
payment, installment amount, loan duration, etc is fixed in advance. This can
help in checking the credit use and then inflation in a country.

3. Publicity

This is yet another method of selective credit control. Through it Central Bank
(RBI) publishes various reports stating what is good and what is bad in the
system. This published information can help commercial banks to direct credit
supply in the desired sectors. Through its weekly and monthly bulletins, the
information is made public and banks can use it for attaining goals of
monetary policy.

4. Credit Rationing

Central Bank fixes credit amount to be granted. Credit is rationed by limiting

the amount available for each commercial bank. This method controls even
bill rediscounting. For certain purpose, upper limit of credit can be fixed and
banks are told to stick to this limit. This can help in lowering banks credit
expoursure to unwanted sectors.

5. Moral Suasion

It implies to pressure exerted by the RBI on the indian banking system without
any strict action for compliance of the rules. It is a suggestion to banks. It
helps in restraining credit during inflationary periods. Commercial banks are
informed about the expectations of the central bank through a monetary
policy. Under moral suasion central banks can issue directives, guidelines and
suggestions for commercial banks regarding reducing credit supply for
speculative purposes.

6. Control Through Directives

Under this method the central bank issue frequent directives to commercial
banks. These directives guide commercial banks in framing their lending
policy. Through a directive the central bank can influence credit structures,
supply of credit to certain limit for a specific purpose. The RBI issues
directives to commercial banks for not lending loans to speculative sector
such as securities, etc beyond a certain limit.

7. Direct Action

Under this method the RBI can impose an action against a bank. If certain
banks are not adhering to the RBI's directives, the RBI may refuse to
rediscount their bills and securities. Secondly, RBI may refuse credit supply to
those banks whose borrowings are in excess to their capital. Central bank can
penalize a bank by changing some rates. At last it can even put a ban on a
particular bank if it dose not follow its directives and work against the
objectives of the monetary policy.

These are various selective instruments of the monetary policy. However the
success of these tools is limited by the availability of alternative sources of
credit in economy, working of the Non-Banking Financial Institutions (NBFIs),
profit motive of commercial banks and undemocratic nature off these tools.
But a right mix of both the general and selective tools of monetary policy can
give the desired results.