How does Bangladesh Bank control the credit? Explain

Bangladesh bank uses two ways to credit control which is Quantitative and Qualitative method. These are discussed below-

Quantitative or General Methods

(i) Bank rate policy:
Bank rate is the rate at which the central bank will rediscount bills of exchange or promissory notes and grant loans on approved securities. Bank rate is also known as discount rate. Sometimes, there may be more volume of credit in the economy. This will lead to higher prices, higher wages and unusual economic activities. Then the central bank may raise up the bank rate. With the rise in the bank rate, the market rates will also go up. This will restrict new investment or expansion or replacement. The ultimate result is that prices will fall due to reduction in the volume of credit, employment and income. The reverse will happen when bank rate is lowered.

(ii) Open market operations:
Open market operations refer to purchase and sale of securities by the central bank in the open market on its own initiative. When commercial banks possess more reserves for credit expansion purpose, the central bank will sell securities in the market. The buyers will pay the central bank with cheques drawn on their own banks. As a result the reserves of these banks will fall, and this will reduce their credit operations. Similarly, when it buys securities it will pay the sellers in cash or with cheques drawn on itself. This will increase credit expansion capacity.

(iii) Variable reserve ratio:
The central bank can control volume of credit by varying cash reserve ratio whenever necessary. If central bank raises the reserve ratio, it will lead to a reduction in the supply of credit. Similarly, by an opposite process the supply of credit may be expanded.

Qualitative or Selective Methods

(i) Rationing of credit:
Rationing of credit means that central bank puts restrictions on accommodation for credit. The credit is now rationed, and as such it will not be available as a general rule. Here central bank limits the amount of credit for each applicant.

(ii) Direct action:
Some of the commercial banks conduct their activities against the instructions as laid down by the central bank. Direct action means that central bank will penalize these banks by charging penalty rates over and above the official discount rate.

(iii) Moral suasion:
This refers to central bank's policy of persuading he commercial banks to conduct their business in a particular way.

(iv) Regulation of consumer's credit:
Consumer's credit is created through the purchase and sale of consumer's durable goods like cars, TV. etc. Their prices are repayable in installments. The central bank may impose strict terms and conditions for restricting this credit or liberalize terms and conditions for encouraging this credit.

(v) Fixation of Margin requirements:
The central bank can also control the flow of credit by varying the 'margin' on borrowing against certain types of securities which are offered by a particular class of borrowers for taking loans.