Page 37 - DMGT303_BANKING_AND_INSURANCE

Banking and Insurance

Notes Techniques of Selective Credit Controls

Three instruments of selective credit controls are discussed below:
Fixation of party wise ceiling on credit: The ceilings are fixed keeping in view the crop prospects,
supply position and price trends. After the fixation of ceiling of credit on a party wise basis since
November 1972, banks are required to seek the prior permission of the Reserve Bank for (1)
granting loans to new borrowers, and (2) increasing the credit limits in case of existing borrowers.
Thus, one bank cannot take over a commodity account, which is subject to credit control from
another bank without seeking prior approval of the Reserve Bank.
Imposition of minimum margin: In case of advances against commodities subject to selective
control, higher margins are prescribed in order to restrict the borrowing capacity of the
borrowers. With higher margin, a borrower can get less credit from banks against a certain
quantity of stock and thus can finance only a smaller part of it through bank finance. Moreover,
different margins may be prescribed for different types of borrowers against the security of the
same commodity. A higher margin is generally for those borrowers whose need for credit is not
so urgent or larger flow of credit to whom is likely to aggravate the price situation.

Example: Minimum margins were prescribed for advances against food grains, pulses
and oilseeds (w.e.f 19th October, 1987) at 45% for processing units/mills and against warehouse
receipts and at 60% for others.
Fixation of minimum lending rate: Though the Reserve Bank had prescribed the interest rates on
various categories of commercial bank advances which include the maximum rates of interest to
be charged in certain cases, the minimum lending rate was prescribed for advances for
commodities subject to selective control.

In order to make selective credit controls more successful, clean credit facilities are not allowed
to any borrower affected by selective credit controls. Appropriate exemptions from the
requirements of the selective credit controls are, however, granted so as to avoid unnecessary
hardship to the deserving borrowers.

Example: Advances granted to certain categories of borrowers e.g. state agencies like
the Food Corporation of India and State Trading Corporation are exempted from the application
of the directives. Exports are exempted from the purview of selective controls.

These restrictions are generally less severe in respect of credit granted to the manufacturing and
processing units and are tighter in case of traders. Similarly, advance against the security of or
by way of purchase of demand documentary bills drawn in connection with the movement of
goods subject to selective controls are exempted, while usance bills are not.
2.5 Risk Management and Central Bank

The survey of central bank risk managers confirms that a high proportion of central banks is
currently restructuring their risk management operations. This survey reveals:

1. Increasing integration of risk management;
2. Recognition of the importance of operational risk;
3. A need for clear objectives for the various departments involved in risk management.

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