Discuss the General Credit Control, the instruments often employed by BB.

There are two types of instruments of credit control. These are:

General or Quantitative   
Selective or Qualitative     

 

Under the General Credit Control, the instruments often employed by BB are discussed below:

 

Bank Rate Policy

The Bank rate has been defined in Act as " the standard rate at which it (BB) is prepared to buy or rediscount bills of exchange or other commercial paper eligible to purchase under this Act. By varying the rate, the BB can to a certain extent regulate the commercial bank credit and the general credit situation of the country. The impact of this tool has not been very great because of the fact that BB does not have a mechanism to control the unorganized sector.

 

Reserve Requirements

The Reserve Bank of Bangladesh is vested with the powers to vary the CRR and SLR as explained above. By varying reserve requirements, the BB restricts/frees the flow of funds by way of credit to different sectors of the economy. When SLR or CRR is increased by BB, It reduces commercial banks' capacity to create credit and thus helps to check inflationary pressures

 

Open Market Operations

Open market operations are a flexible instrument of credit control by means of which the Reserve Bank on its own initiative alters the liquidity position of the bank by dealing directly in the market instead of using its influence indirectly by varying the cost of credit. Open market operations can be carried out by purchases and sales, by Central Bank, of a variety of assets such as government securities (G-sec), commercial bills of exchange, Foreign exchange, gold and even company shares. In practice, however, BB confines to the purchase and sale purchase of government securities including treasury bills. When the BB purchases government securities from the banks, the latest deposits with it tend to increase adding to the cash reserves of banks and hence their capacity to expand credit increase. Conversely, when the BB sells securities to the banks, their deposits with BB would get reduced, contracting the credit base. The net result would be a contraction of credit and a reduction in money supply.

 

Repo Rate and Reverse Repo Rate:

          Repos: The BB introduced repurchase auctions (Repos) since December,1992 with regards to dated Central Government securities. When banking systems experiences liquidity shortages and the rate of interest is increasing, the BB will purchase Government securities from Banks, payment is made to banks and it improves liquidity and expands credit.

 

          Reverse Repos : Since November, 1996 BB introduced Reverse Repos to sell Govt. securities through auction at fixed cut-off rates of interest. It provides short term avenues to banks to park their surplus funds, where there is considerable liquidity and call rate has a tendency to decline. These two rates are, now-a- days, commonly applied for reducing money supply or increasing it.

 

Moral Suasion

Moral Suasion indicates the advice and exhortations given by the Reserve Bank to the banks and other players in the financial system, with a view to regulate and control the flow of credit, generally, or to any one particular segment of the economy. This may be attempted through periodical discussions/communications. With a substantial share of banking business being in the public sector, this tool has proved effective.

 

Direct Action

This technique indicates the denial of the Reserve Bank to extend facilities to the banks which do not follow sound banking principles or where the Reserve Bank feels the capital structure of the bank is very weak. This is not attempted frequently but is used in rare cases involving continual and wilful violations of policies of the Reserve Bank/Govt. of Bangladesh.