Which of the following is not an instrument of Selective Credit Control? Select the correct answer.
Contents13
- ARegulation of consumer credit
- BRationing of credit
- CMargin requirements
- DCash reserve ratio
Show answer
Answer: (D) Cash reserve ratio
Explanation:
Option (d) is correct:
Selective credit control refers to a qualitative method of credit control by the central bank.
The method aims, unlike general or quantitative methods, at the regulation of credit taken for specific purposes or branches of economic activity.
It aims at encouraging good credit, i.e., development credit while at the same time discouraging bad credit, i.e., speculative credit, etc.
The instruments of selective credit control are:
- minimum margins
- regulation of consumer credit for durable goods
- rationing of credit, etc.
Cash Reserve Ratio (CRR) is not an instrument of selective credit control.
Selective credit control allows the central bank to target specific sectors or purposes rather than controlling all credit equally across the economy.
CRR affects all banks uniformly and controls the total money supply, while selective instruments like margin requirements and credit rationing target particular types of lending or economic activities.
Selective Credit Control
Indian Economy Selective Credit Control Regulation of consumer credit Rationing of credit Margin requirements
Selective Credit Control: RBI's Targeted Monetary Tools
Selective Credit Control = qualitative tool targeting specific sectors/purposes
Encourages development credit, discourages speculative credit
Main instruments: margin requirements, consumer credit regulation, credit rationing
CRR is NOT selective - it's a quantitative tool affecting all banks equally
What is Selective Credit Control
Selective Credit Control is RBI's qualitative monetary policy tool that targets credit for specific sectors or purposes. Unlike quantitative tools that affect the entire banking system equally, selective controls allow RBI to encourage productive lending while discouraging speculative activities.
Selective vs General Credit Control
Aspect | Selective Credit Control | General Credit Control |
|---|---|---|
Nature | Qualitative | Quantitative |
Target | Specific sectors/purposes | Entire banking system |
Objective | Encourage good credit, discourage bad credit | Control overall money supply |
Examples | Margin requirements, Consumer credit regulation | CRR, SLR, Repo Rate |
Impact | Sectoral/targeted | Economy-wide |
Instruments of Selective Credit Control
Instrument | How it Works | Purpose | Example |
|---|---|---|---|
Margin Requirements | Minimum down payment for loans against securities | Control speculative trading | 50% margin for share purchases |
Consumer Credit Regulation | Limits on credit for durable goods | Control consumption patterns | Restrictions on car/appliance loans |
Credit Rationing | Limiting credit to specific sectors | Direct sectoral control | Reduced lending to real estate speculation |
Moral Suasion | RBI's informal guidance to banks | Influence lending behavior | Requesting focus on priority sectors |
Question Context
This question tests the distinction between qualitative (selective) and quantitative (general) monetary tools. Cash Reserve Ratio (CRR) affects all banks uniformly by changing the amount they must keep with RBI - it's not selective or targeted.
Trap: Confusing CRR as selective because it 'controls' credit - but CRR is quantitative (affects all banks equally)
Memory aid: Selective = Specific sectors; CRR affects all banks uniformly
Common error: Thinking margin requirements are general tools - they're sector-specific (securities market)
Distinction: If it targets particular activities = selective; if it affects entire system = general
Cash Reserve Ratio (CRR)
Indian Economy Cash reserve ratio
Cash Reserve Ratio: RBI's Primary Quantitative Tool
CRR = percentage of deposits banks must keep with RBI in cash
Quantitative tool - affects entire banking system uniformly
No interest paid on CRR deposits with RBI
Current range: 3-15% as per RBI Act
CRR Mechanism
Cash Reserve Ratio (CRR) is the percentage of total deposits that commercial banks must maintain with RBI in cash form. When RBI increases CRR, banks have less money to lend, reducing money supply. When decreased, more funds are available for lending, increasing liquidity.
How CRR Controls Money Supply
%%{init: {"flowchart": {"wrappingWidth": 460}}}%%
flowchart TD
s1["`**RBI increases CRR**
Banks must park more cash with RBI`"]
s2["`**Reduced lendable funds**
Banks have less money to give as loans`"]
s3["`**Decreased lending**
Fewer loans mean less money creation`"]
s4["`**Reduced money supply**
Overall liquidity in economy decreases`"]
s1 --> s2
s2 --> s3
s3 --> s4CRR vs Other Quantitative Tools
Tool | What Banks Maintain | Interest Paid | Primary Purpose |
|---|---|---|---|
CRR | Cash with RBI | No interest | Control money supply |
SLR | Liquid securities (bonds, etc.) | Yes (from securities) | Ensure bank liquidity |
Repo Rate | Borrowing cost from RBI | Interest charged | Control short-term rates |
Key distinction: CRR is quantitative (affects all banks equally), NOT selective (sector-specific)
Common confusion: CRR vs SLR - CRR is cash with RBI, SLR is securities held by banks
Remember: No interest on CRR deposits - this makes it a strong monetary tool
Quantitative vs Qualitative Monetary Policy
Indian Economy
Monetary Policy Tools: Quantitative vs Qualitative Methods
Quantitative tools control overall money supply (CRR, SLR, Repo)
Qualitative tools target specific sectors/activities (Selective controls)
RBI uses both types for comprehensive monetary management
Complete Classification of RBI Tools
Type | Also Called | Objective | Key Instruments | Impact |
|---|---|---|---|---|
Quantitative | General Credit Control | Control total money supply | CRR, SLR, Repo/Reverse Repo, OMO | Economy-wide |
Qualitative | Selective Credit Control | Target specific sectors | Margin requirements, Consumer credit regulation, Credit rationing | Sector-specific |
RBI's Monetary Policy Arsenal
# RBI Monetary Tools
## Quantitative Tools
- Cash Reserve Ratio (CRR)
- Statutory Liquidity Ratio (SLR)
- Repo Rate
- Reverse Repo Rate
- Open Market Operations (OMO)
## Qualitative Tools
- Margin Requirements
- Consumer Credit Regulation
- Credit Rationing
- Moral SuasionStrategic Usage
RBI combines both approaches: quantitative tools for broad economic stability (inflation control, liquidity management) and qualitative tools for targeted interventions (preventing asset bubbles, promoting priority sectors). The mix depends on specific economic conditions and policy objectives.
Critical distinction: If tool affects ALL banks equally = quantitative; if sector-specific = qualitative
UPSC favorite: Questions mixing up CRR (quantitative) with selective credit tools
Memory trick: Quantitative = Quantity of money; Qualitative = Quality of credit (good vs bad)