what is selective credit control

Selective credit control is a qualitative tool of the central bank used to direct credit into priority sectors and restrict it in non-priority or speculative areas. Instead of regulating the total supply of credit, it guides the flow of funds toward productive uses. This is done through measures such as changing margin requirements, setting credit ceilings, applying differential interest rates, or using credit rationing to promote essential investments and discourage speculative activities.

Purpose of Selective Credit Control

The main purpose of selective credit control is to regulate the flow of credit in the economy by directing it toward productive and priority sectors while restricting its use in non-essential or speculative activities. This helps:

• Promote growth in essential sectors like agriculture and industry.
• Prevent misuse of credit for hoarding, speculation, or unproductive purposes.
• Maintain price stability and curb inflationary pressures.
• Ensure balanced economic development.

Key Instruments of Selective Credit Control

1. Margin Requirements – Changing the proportion of loan value against the security pledged to discourage excessive borrowing for speculation.
2. Credit Ceilings – Setting maximum limits on the amount of credit that banks can lend for certain purposes.
3. Credit Rationing – Restricting or allocating credit to specific sectors to ensure priority areas get funds.
4. Differential Interest Rates – Charging lower rates for productive/priority sectors and higher rates for non-essential or speculative ones.
5. Directives by Central Bank – Issuing guidelines or instructions to banks on lending policies for specific sectors.

How it Differs from Quantitative Controls

1. Nature of Control
   • SCC: Qualitative — controls who gets credit and for what purpose.
   • QCC: Quantitative — controls how much total credit is available in the economy.
2. Objective
   • SCC: Directs credit to productive/priority sectors and restricts speculative uses.
   • QCC: Manages overall money supply, inflation, and liquidity.
3. Instruments Used
   • SCC: Margin requirements, credit rationing, differential interest rates, directives.
   • QCC: Bank rate, cash reserve ratio (CRR), statutory liquidity ratio (SLR), open market operations.
4. Scope
   • SCC: Selective and sector-specific.
   • QCC: Economy-wide, affecting all sectors uniformly.