Selective Credit Control

Selective Credit Control measures are distinct from general credit control instruments because they target specific credit uses and the overall volume of credit. In order to reinforce factors that help the entire economy remain stable, the rationale for selective credit control operations has been to distinguish between different uses of credit, various economic sectors or channels through which credit flows from the stream of the banking system. The goal is to change the flow of funds for specific purposes without affecting the banks’ reserve positions or the amount of credit that is available in general.

Selective Credit Control Meaning

The term “Selective credit control” means how a central bank approaches credit control on a qualitative level. In contrast to more general or quantitative approaches, this method focuses on regulating credit taken for specific purposes or economic activities. The monetary authorities use the term “selective credit controls” to refer to restrictions on the allocation of bank resources to specific economic sectors according to national priorities. In contrast to general credit control instruments, selective credit controls are designed to alter the distribution of credit or the purpose or use of credit. As a result, these checks are viewed as high-quality credit control instruments.

The Objective of Selective Credit Control

• In order to use the available funds for the most urgent and desirable purposes.

• Regulating and controlling even non-banking financial institutions.

• Control of credit on the stock market.

• Limiting the amount of credit available for the purchase of durable goods.

Categories of Selective Credit Control

• Different interest rates and limits on the amount of credit available for specific purposes, as well as minimum margins, higher or lower for lending against specific securities.

• Regulation of durable goods consumer credit.

Selective Credit Control techniques

Ceiling on the degree of credit  

In order for banks to be able to lend against particular controlled securities, a ceiling on the level of credit must be set.

Minimum Required Margin 

Collateral Security is required to secure a loan. Margin is the percentage of the security value considering which a loan is not granted. An increase or decrease of margin for specific security is stimulated or discourages credit flow to a specific sector. It can range anywhere from 20% to 80%. As much as 75% of agricultural products fall under this category. The lower the margin, the less likely a loan will be granted.

Discriminatory Interest Rate (DIR) 

The Reserve Bank of India charges lower interest rates on credit extended to particular priority or weaker sectors through the Direct Investment Regulation. The RBI issues additional instructions regarding granting further credit in consideration of sensitive commodities, the furnishing of guarantees, and the making of advances.

Directives 

Advancing directives are given to banks by the Reserve Bank of India. Loans can only be given for a specific purpose if guidelines exist.

Direct Action 

It’s too harsh, so it’s rarely followed. If the bank fails to comply with the directives of the RBI, it may result in a refusal by the RBI regarding rediscounting of bills or cancellation of its licence.

Moral Suasion 

The Reserve Bank of India issues periodic letters to banks to control general credit or advances considering specific commodities. In this regard, regular meetings are conducted with the heads of commercial banks.

Selective Credit Control by RBI

Selective Credit Control is regulated by the Central Bank of India, The Reserve Bank of India (RBI). It has been given authority and responsibility to regulate advances by commercial banks and determine government policies relating to bank loans when it considers it necessary to do so in the public interest or in the interests of the depositors in particular.

The RBI may also give the banks specific directions on various aspects of providing accommodation:

• There are a wide range of reasons why advancements can or cannot be made.

• Margins that must be maintained in the case of secured loans

• A bank’s financial position, including its capital, reserves, and deposits, as well as other relevant considerations, must be taken into account when determining the maximum amount of advances or other financial accommodations that a bank can make on behalf of any one company, firm, an association of persons or individual.

• The terms and conditions under which advances or other financial accommodations may be granted or guarantees given, such as interest rates and other terms and conditions.

Conclusion

According to what has been said thus far, selective credit controls can serve as useful supplements to general credit controls and will prove to be truly effective if general measures for credit control properly support them. Selective credit controls should be used in conjunction with and rather than as a substitute for more conventional methods of limiting credit risk. Selective credit control, however, should be viewed as a short-term fix. As a result of Selective Credit Control, only those borrowers who meet certain criteria are given access to credit, which is used for a specific purpose.