indirect credit control

Indirect Credit Control

Indirect credit control is a method through which the authorities limit or regulate the access of the people or organizations to money or credit. This type of control has been used for decades to manipulate the money or credit in an economy. The idea behind such control is to limit the volatility in the economic system, to maintain the stable flow of resources and development, and to reduce the uncertain effects of market forces.

One of the most common ways in which the authorities implement this type of control is through the setting up of reserved requirements. This system requires banks to keep a certain percentage of their deposits at the central bank. This forces banks to limit the amount of lending that they can do and thus prevents them from exposing themselves to an excessive amount of risk.

Interest rate control is another form of indirect credit control. When the authorities increase the rate of interest, they discourage people from borrowing from the financial markets, thereby reducing the chances of over-borrowing and the risk of loan defaults. Similarly, when the authorities conveniently lower the rate of interest, it encourages people to borrow more money and reduces the chances of default on loans.

The government can also regulate the banking system by changing the repo rates. Repo rates are the discounted rates at which the commercial banks can borrow money from the government by mortgaging bonds, bills or other securities. The government can also fix the rate of exchange between the foreign and domestic currency, so as to maintain stability in the foreign exchange market.

The authorities can also introduce Quantitative Controls to enable them to control the amount of money that is available in an economy. Such controls mainly refer to the use of expansionary or contractionary monetary policies. Expansionary policies involve the injection of more money into an economy, increasing the public liquidity, while contractionary policies involve a decrease in the public money supply, to decrease spending and reduce the risk of inflation.

Finally, the government can regulate the credit availability in an economy by making use of the Open Market Operations. This process involves the selling and buying of various financial products by the central banks to regulate the flow of money in an economy. This in turn helps with the management of interest rates, liquidity and credit availability.

Overall, Indirect Credit Control provides the authorities with an effective mechanism to ensure the stability of the economy and the safety of the citizens. It enables the government to monitor and regulate the amount of money and the credit available in an economy and to manage the demand for it for the purpose of curbing any arbitrary fluctuations. Using such control has helped in the establishment of sound economic systems throughout the world and allowed for the efficient functioning of any economy.

Indirect Credit Control is a vital tool for maintaining an efficient and stable economy. Though each and every country’s governmental setups are different and their respective strategies of using this type of control vary, one thing is common in all - the utilization of such control schemes is important in creating a secure and stable financial system, the bedrock of which lies the proper maintenance of the flow of money within an economy.

Indirect credit control is one of the main types of credit control measures used by governments to tackle the issue of excessive credit generation. This type of credit control involves influencing the supply of credit available in the market, without directly intervening in the lending process.

The most common form of indirect credit control is through setting the official interest rate. This rate, known as the Bank of England’s base rate, is the rate which the Bank of England can lend to other commercial banks overnight. By establishing this rate, the Bank of England can create favourable or unfavourable conditions in the money markets to moderate the overall level of credit in the economy.

Another form of indirect credit control is the use of quantitative measures. This involves the setting of credit ceilings or ceilings, which specify the maximum amount of credit which commercial banks are allowed to extend to their customers. These caps often change depending of the economic conditions, and if necessary, can be tightened or loosened at any given time.

Finally, the Bank of England can also use open market operations to influence the supply of credit. This involves the purchase or sale of securities and currencies in the open market, which can affect the interest rate on certain types of loans. This type of intervention is particularly useful when there is a need to quickly cool down a hot economy, as it can raise the cost of borrowing, and hence reduce credit supply.

Overall, indirect credit control is one of the most important tools available to governments in controlling the credit climate in an economy. It provides an effective means of moderating the overall supply of credit available in the market, without directly intervening in the borrowing process.