Saturday, August 22, 2009
Credit Control and its Objectives
The present day economy is referred as the credit economy because credit has come to play a predominant role in modern economic system. The over whelming majority of business transactions particularly in western countries are settled through the use of credit instruments by the parties concerned. Infact it would not be wrong to say that credit is the lift-blood of modern business. We are already aware of the fact that credit plays the same role in the economy as money. As such exchanges in the volume of credit have exactly the same effect on the internal price level as changes in the supply of money. It therefore becomes necessary to exercise some control on the creation of credit for the smooth functioning of the economy. A free and unlimited creation of credit by the commercial banks possesses a serious threat to the national economy. Hence it becomes necessary to keep the creation of credit under the control of Central bank. The central bank is the most appropriate body to control the creation of credit in view of its functions as the bank of issue and the custodian of cash reserves of member banks.
OBJECTIVES OF CREDIT CONTROL
The important objectives of credit control are given below.
1. STABILITY IN THE INTERNAL PRICE LEVEL
As is well known, the economy of a country suffers a good deal as a result of violent fluctuations in the internal price level. Hence the main objective of credit control is to establish stability in the internal price level. If the supply of credit is less than the commercial requirements, there is sure to be decline in the price level. If on the contrary the supply credit exceeds the commercial requirements the internal prices are bound to rise up. Hence the commercial banks should try to bring about a proper adjustment between the supply of credit and the commercial requirement of the country.
2. CONTROL OF THE BUSINESS CYCLE
As is well known, the operation of the business cycle causes an atmosphere of economic stability in a capitalist country. Hence the objective of credit control policies of the central bank should be to eliminate or at least to reduce the havoc caused by business cycle. By varying the supply of credit, the Central Bank can, to some extent, control the operation of the business cycle.
3. STABILITY IN EXCHANGE RATES
Introducing stability in the foreign exchange rates can also be an objective of the credit control policy of the central bank. The instability in exchange rates can have harmful repercussions on the foreign trade of the country. Hence central bank in those countries whose foreign trade is important should pay special attention to the elimination of violent fluctuation in foreign exchange rates through credit control policy.
4. STABILIZATION OF THE MONEY MARKET
According to some economists, the credit control policy of the central Bank should aim at the stabilization of the money market in the country. To achieve this objective, the Central Bank should neutralize seasonal variations in the demand for funds. It should for example provide extra credit in times of emergencies. Infact the control on credit should be exercised by the Central Bank in such a manner as to bring about an equilibrium in the demand and supply of money at all times.
5. PROMOTION OF ECONOMIC GROWTH
The objective of credit control policy is backward and under developed countries should be able to promote economic growth within the shortest possible time. Generally speaking the economic development in these countries is retarded an account of lack of financial resources. Hence the Central Bank in these countries should try to solve the problem of financial stringency through planned expansion of bank credit.
6. PREPARATION OF WAR
Sometimes, the objective of the Central Bank is to prepare the country for war through expansion of credit to enable the government to meet its financial requirements. Modern wars are so expensive that it is not possible to meet their costs without adequate expansion of bank credit. During the Second World War almost every country resorted to expansion of credit on large scale to meet the rising war expenditure.
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