Question

Selective credit control:

• A. Regulate the quantity of credit created by commercial banks.
• B. Regulate the quantity of demand deposits created by commercial banks.
• C. Selectively allocate credit to commercial banks.
• D. Selectively allocate credit among borrowers.

Hint:

Think of quantitative controls as a faucet that controls the overall flow of water (money volume), and selective controls as a valve system that directs water to specific fields (allocating credit to specific sectors/borrowers).

Answer 1

The Correct Option is D

Step 1: Understanding the Concept:
Monetary policy tools are divided into quantitative (general) methods and qualitative (selective) methods. Selective credit controls are qualitative measures used by central banks to influence the flow of credit to specific sectors of the economy.

Step 3: Detailed Explanation:
Let us examine the operational mechanisms of credit control:
Quantitative credit controls (such as the Bank Rate, Cash Reserve Ratio, Statutory Liquidity Ratio, and Open Market Operations) influence the total volume of money supply and credit creation in the banking system. They regulate options (A) and (B).
Qualitative (Selective) credit controls do not focus on the total quantity of credit. Instead, they focus on directing credit towards priority sectors (such as agriculture or small-scale industries) and restricting credit to speculative or unproductive sectors.
These tools include regulating consumer credit margins, fixing credit quotas, and issuing directives to selectively allocate credit among different classes of borrowers or sectors.
Thus, selective credit control refers to the selective allocation of credit among borrowers.

Step 4: Final Answer:
The correct option is (D).