Page 129 - DMGT401Business Environment

Business Environment

Notes 7. Selective Credit Control: Selective and qualitative credit control refers to regulations of
credit for specific purposes or branches of economic activity. The aim of selective control
is to discourage such forms of activity as are considered to be relatively inessential or less
desirable. Selective control has been used in Western countries to prevent the demand for
durable consumer goods outrunning the supply and generating inflationary pressure.

Example: They have been used particularly to prevent speculative hoarding of sensitive
commodities such as paddy, rice, wheat, pulses, oil-seeds, oils, vanaspati, cotton sugar, gur etc.
Under the Banking Regulation Act, 1949, Section 21 empowers the RBI to issue directives
to banks regarding their advance. The RBI mainly relies on three techniques of selective
credit controls:
(a) The determination of margin requirement for loans against certain securities,

(b) Determination of maximum amount of advances or other financial accommodation,
(c) Charging of discriminatory interest rates on certain types of advances.
Besides this, the RBI may also give directions to banks in general or even some particular
bank as to the purpose for which loans may or may not be given. These directions may
relate to:
(a) The purpose for which advances may or may not be made.

(b) The margins to be maintained in respect of secured advances.
(c) The maximum amount of advances to any borrower.
(d) The maximum amount upto which guarantees may be given by the banking
company on behalf of any firm, company, etc.
(e) The rate of interest and other terms and conditions for granting advances.
The Credit Authorization Scheme introduced in 1965 is also a kind of selective credit
control. Under these schemes the RBI regulates not only the quantum but also the terms on
which credit flows to the different large borrowers, so that credit is directed to genuinely
productive purposes, that it is in accordance with the needs of the borrower, and there is
no undue channelling of credit to any single borrower or group of borrowers.
8. Credit Authorization Scheme: This technique was introduced in November 1965 with a
view to regulating the volume and terms of credit supplied to large borrowers. As per this
scheme, if the fresh working capital limit (inclusive of bill finance) to be sanctioned to any
single party by any one bank or the entire banking system exceeded a stipulated level, the
bank would require prior authorisation of the RBI for sanctioning such a loan. This stipulated
level or cut-off point was fixed at 1 crore at the beginning. It was subsequently increased
to 2 crore in November 1975, 4 crore in 1983 and to 6 crore thereafter.

In the second half of 1988, the RBI withdrew the scheme, and in its place a Credit Monitory
Arrangement was introduced. According to the new scheme, credit proposal for 5 crore
and above in the case of working capital and 2 crore and above in the case of term loans,
had to be submitted to the RBI for post-sanction scrutiny.
9. Fixation of Inventory Norm and Credit Norms: The banks were required to advance credit
for working capital to different industries in the light of inventory norms laid down by
the Committee of Direction (COD) and its sub-committees. These committees reviewed
and revised the norms from time to time in case of different industries and banks had to
implement the new norms as and when they were formulated.

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