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.
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.
In order for banks to be able to lend against particular controlled securities, a ceiling on the level of credit must be set.
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.
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.
Advancing directives are given to banks by the Reserve Bank of India. Loans can only be given for a specific purpose if guidelines exist.
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.
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 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:
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.
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