The instruments of control discussed so far are commonly known as general or quantitative methods of credit control, while the regulation of credit for specific purposes is termed as selective or qualitative credit control. Whereas the general credit controls relate to the total volume of credit (via changes in H) and the cost of credit, selective credit controls operate on the distribution of total credit.
The latter can have two main aspects: positive and negative. On the positive front, measures can be used to encourage greater channeling of credit into particular sectors, as is being done in India in favour of designated priority sectors. On the negative side, measures are taken to restrict the flow of credit lo particular sectors or activities. Most of the time, the term selective credit controls is used in this latter sense.
Selective credit controls (SCCs) are used in the western countries for such purposes as regulating stock market credit or credit or consumer durables. In India such controls have been used mainly to prevent speculative hoarding of essential commodities like food grains and agricultural raw materials to check an undue rise in their prices.
The underlying theory of such controls is very simple: if availability of bank finance for purchasing and holding some “Commodities is restricted, the capacity of traders to hold their stocks will get restricted, the market supply of these commodities will be easier than otherwise and their prices will not rise as much as they would have done otherwise.
Thus stated, the degree of success of SCCs will depend upon several factors, discussed below:
1. The extent of effective credit restrictions:
Since SCCs are generally security-oriented and not purpose-oriented, influential borrowers can manage to escape the bite of these measures by borrowing against the security of other collaterals and using the funds so borrowed for indulging in the speculative holding of stocks. Therefore, the effectiveness of SCCs is likely to improve if they are fully supported by general credit controls.
2. The availability of non-hank finance:
To the extent traders do not depend upon banks for financing their inventories and have other sources of finance (their own and of the unregulated credit markets), they will again escape the constraints of the SCCs. With ‘black money’ rapidly multiplying in the economy, this factor is becoming more and more important over time so that even if the bank credit is effectively restricted in particular directions, speculative hoardings may not be curtailed much. Obviously, much will depend on the cost and availability of non-bank finance to the parties concerned.
3. The degree of shortfall in supply in relation to normal demand:
The greater this shortfall, the more will the speculative fever rise. In cases of acute shortages, credit controls should be imposed well in time without waiting for the prices of sensitive commodities to actually rise.
From the above brief discussion it can be inferred that SCCs can at best, serve as useful supplements to general credit controls and will be more successful in company with the latter than without them. Even then, they should be viewed as only short-term and not long-term measures. In any longer-run planning, the supply position must be improved and brought in better balance with demand. Also, the SCCs can only moderate the price rise and not arrest it completely.
In India, SCCs were first introduced in May 1956. Since then the)’ have been expanded in coverage, scope and content. At present, the commodities covered by the SCCs include food-grains, major oilseed and vegetable oils, cotton and kapas, sugar, gur and khandsari, cotton textiles, including cotton yarn, man-made fibres and yarn and made out of man-made fibres (including stock-in-process).
The RBI operates the SCCs under the directive powers conferred on it by Banking Regulation Act.
The techniques of SCCs used generally are:
(a) Minimum margins for lending against securities. The margins vary from the low of 20% (for certain varieties of cotton) to the high of 85% (for stocks of major vegetable oils);
(b) Ceilings on maximum advances to individual borrowers against stocks of certain commodities;
(c) Minimum discriminatory rates of interest prescribed for certain kinds of advances;
(d) Prohibition of clean advances for financing hoarding of sensitive commodities; and
(e) Prohibition of the discounting of bills covering sale of sensitive commodities.
As the SCCs are focussed mainly on credit to traders for financing inventories, the RBI generally ensures that credit for production, movement of commodities and exports is not adversely affected by such controls. The RBI has made frequent changes in its SCC directives with changing market conditions.
No definitive information is available about the degree of success or failure of the SCCs. However, there is a general presumption that they do moderate speculative pressures on the prices of sensitive commodities to some extent.