Selective Credit Control

(a) Regulation of Consumer Credit:

This measure to control credit was adopted first of all in the USA in 1941 with a view to keeping the consumption spending at low level.

Under this method the central bank of a country is authorized to lay down terms and conditions for the proper regulation of consumer credit extended by the commercial banks of a country.

Through this method, the purchase of consumer durables like houses, furniture, electric and household appliances, etc., is regulated.

The regulation of consumer credit is a supplementary instrument along with more basic monetary and fiscal tools. Consumer credit regulation is based on the observation that the monetary demand for consumers’ durable goods is extremely unstable and is of strategic importance to general price movements and to the economic activity in the economy. During inflation a good deal of credit is used for expenditure on consumer durable goods and credit-expansion becomes a danger to the future stability of the economy.


In USA installment buying of durable and semi-durable goods on a large scale during World War II was held responsible not only for increased inflationary pressures but also for disturbing production of goods for defence purposes.

Regulation of consumer credit restricts the amount of credit that might be given by commercial banks and also restricts the time that might be agreed upon for repaying the obligations. For example, in USA during Second World War, it covered charge accounts, down payments on installment buying, the time for which credit could be extended, etc.

Monetary authorities, therefore, recognize the significance of prescribing stiffer terms in a boom period and allowing easier terms during deflation. In underdeveloped countries where the consumer demand is confined to basic necessities of life, like food, clothing etc., this method is of little use because of practically little or no installment buying.

(b) Margin Requirements:

Another important method of selected credit control in the hands of a central bank is variables in ‘margin requirements’ regulations. ‘Margin’ refers to the difference between market value of securities and the amount borrowed against these securities. This method of credit regulation was first of all tried in the USA in 1934. In recent years, it had been tried in India also to restrict speculation or hoarding in essential commodities. The essence of this method is that a bank while advancing credit against a security does not lend the full amount (full value of security) but less.


It is done by keeping a margin or difference between the value of security and the amount of advance to cover any possible loss. During inflationary boom businessmen and speculators try to get credit by pledging gold or securities to the bank. A bank does not advance loan equal to the value of the security but less, e.g., a commercial bank lends Rs. 800 against a security worth Rs. 1,000 the margin is Rs. 200 or 20 per cent.

The central bank can raise this margin requirement to 30 or 50 per cent, or even to 100 per cent, in which case the commercial bank could advance nothing, as was done in USA during II World War. The higher the margin requirement, the lower is the loan one can get on a security of certain value. The central bank may altogether stop the advancing of loans against any particular type of collateral such as foreign securities, commodities like wheat, rice or cotton, the idea being to reduce the hoarding of these commodities with the help of bank credit.

(c) Moral Persuasion:

Moral persuasion has been used as a means of credit control by the central banks in many countries. Through this method, central banks often exert great influence over the loan policy of member banks. Usually, there is a close co-operation between central bank and member banks, and the former may generally persuade the latter to follow its lead. Moral persuasion impellers informal request by the central bank to commercial banks to contract loans in times of expansion and to expand credit in times of depression.

In countries like UK, France, Sweden and Holland where central bank is regarded as the financial leader, it can always exert its influence upon the member banks as regards credit expansion and credit contraction. Moral persuasion makes it easier for the central bank to secure the willing and active co-operation of member banks.


Its success, however, depends on the prestige and authority it enjoys over the member banks, the extent to which the lead given by the central bank will be followed by the member banks, the technical means and statutory powers of the central bank, the degree of co-operation between central bank and member banks as well as other financial institutions, makeup of the country’s banking and credit structure, organisation of the money market, etc.