Direct Control Of Bank Advances
The two methods of monetary control described above (the traditional weapon and the direct control of liquidity) belong to the class of weapon that re called quantitative technique. They affect the economy generally without regard to the various units in it. In this article we will be looking at the classes of weapon which are mostly referred to as qualitative techniques quantitative (or selective) in the sense that they are aimed at influencing the direction of bank advances and the amount that goes in a particular direction.
Besides minimizing the rather general effects of monetary policy, qualitative techniques have other uses. They can be used to regulate the pace and content of economic development. The techniques become particularly attractive in these days of planned development. They consist of all the officially signed off hindrances, which is in relation with the volume and direction of credit in the affected sectors of the country’s economy which planners has forecast are of crucial importance moving forward with the country’s to economic development.
They can also be used as anti inflationary techniques in preventing the flow of resources to those sectors of the economy that are sensitive to inflationary pressures. Finally, they can be used as alternatives to general monetary weapons. In countries where the money markets are underdeveloped and where the money market instruments are few or rudimentary, the scope for the traditional weapons (and even to some extent, the direct control of bank liquidity) is limited. The qualitative techniques discussed below can serve as alternatives.
This technique involves the central banks control of advances. Its chief aim is to prevent banks from lending too much against commodities that are likely to be subject to speculative hoarding. It involves the variation in liquidity (or loan value) of an asset acceptance by banks as collateral for advances. It is in effect the minimum required down payment stated as a percentage of the market value of the security, the minimum margin requirements being the per-centage of the value of the security that may not be borrowed or lent out.
Individual Or Aggregate Loan Ceiling
This is an administrative order preventing commercial banks from increasing total advances or certain specific advances above a level attained as particular date a date usually fixed by the central bank. The ceiling takes two forms. The individual loan ceiling is aimed at the character or composition of bank advances rather than their volume. In Nigeria, for example, credit guidelines have been at various times, imposed on the financing of external trade. An aggregate loan ceiling on the other hand, is aimed at preventing a net increase in bank advances beyond the level suggested by the central bank of Nigeria.
Directives And Moral Suasion
Directives and moral suasion are those technique that are usually referred to as the formal and then the informal techniques. Former directives usually have the backing of law as stipulated and allow by the central bank of the country which is meant to control the advances policy of commercial banks.
Informal control (in essence moral suasion) does not have the backing of the law, just as has been described in the first. It relies on the acceptance of the leadership role of the central bank plays and also on its activities within the monetary system and on the co-operation of the commercial banks and the central banks for its effectiveness. Perhaps what really makes moral suasion effective is that non compliance carries with it the danger of registration, which might put the commercial banks in a straight jacket of control.
While direct controls place limits on banks freedom to undertake certain activities, moral suasion works by suggesting priorities in leading. Direct controls are usually resorted to when it is eared that other methods of influencing the bank lending will not work quickly or in the desired direction. On the other hand, moral suasion is used when it is founded that the ordinary market force do not (and possibly cannot be made to) work in the public interest.
Under such a condition of market failure, credit does not necessarily go to the individual or institution that is prepared to pay the highest price. If then, the central bank decides on what it thinks is in the interest of the public, it can appeal to the commercial banks to follow its wishes.