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Qualitative method of Credit Control - Central Banking, Indian Financial system Video Lecture | Indian Financial System - B Com

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FAQs on Qualitative method of Credit Control - Central Banking, Indian Financial system Video Lecture - Indian Financial System - B Com

1. What is a qualitative method of credit control?
Ans. A qualitative method of credit control refers to the measures taken by central banks or regulatory authorities to influence the availability and cost of credit through non-quantitative means. This approach focuses on influencing the quality and nature of credit rather than the quantity. It involves setting guidelines and regulations for banks and financial institutions to follow, such as lending limits, sector-specific lending norms, priority sector lending targets, and loan classification standards.
2. How does the central bank use qualitative methods to control credit in India?
Ans. The central bank of India, known as the Reserve Bank of India (RBI), uses several qualitative methods to control credit in the Indian financial system. These methods include prescribing sector-specific lending targets to ensure adequate credit flow to priority sectors like agriculture, micro, small and medium enterprises (MSMEs), and housing. The RBI also sets loan classification standards to ensure the proper classification of assets and the provisioning required for potential losses. Additionally, the RBI sets guidelines for exposure limits to certain sectors and regulates the interest rates charged by banks.
3. What are the advantages of qualitative credit control methods?
Ans. Qualitative credit control methods offer several advantages. Firstly, they allow the central bank to target specific sectors or industries that require credit support, such as agriculture or MSMEs. This helps in achieving socio-economic objectives. Secondly, these methods enable the central bank to ensure the quality of credit by setting standards for loan classification and provisioning, reducing the risk of asset quality deterioration. Lastly, qualitative methods provide flexibility to the central bank to adapt to changing economic conditions and specific credit needs.
4. Are there any limitations or challenges associated with qualitative credit control methods?
Ans. Yes, there are certain limitations and challenges associated with qualitative credit control methods. One limitation is that these methods may not be as effective in controlling the overall credit supply. Unlike quantitative methods like changing interest rates or reserve requirements, qualitative measures do not directly impact the quantity of credit available in the economy. They mainly influence the nature and quality of credit. Additionally, implementing and monitoring qualitative measures require a robust regulatory framework and effective supervision, which can be challenging for regulatory authorities.
5. How do qualitative credit control methods impact borrowers and lenders in the Indian financial system?
Ans. Qualitative credit control methods can have a direct impact on both borrowers and lenders in the Indian financial system. For borrowers, these methods can result in preferential treatment or targeted credit availability for specific sectors or industries. For example, sectors like agriculture and MSMEs may benefit from lower interest rates or relaxed lending norms. On the other hand, lenders need to comply with the guidelines and regulations set by the central bank, which may require them to allocate a certain percentage of their lending portfolio to priority sectors. Lenders also need to ensure proper loan classification and provisioning, which impacts their profitability and risk management practices.
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