Monetary policy may achieve credit control in various ways depending upon whether the control

desired is quantitative control or qualitative control. The former refers to the volume of
purchasing power and latter to the use to which it may be put.

(a) QUANTITATIVE CONTROL

The methods of quantitative control include the following.
Bank Rate Policy: The Central Bank of the country raises or lowers as needed, its Bank Rate
(discount rate) for first calls paper thus influencing other interest rate sin the money market. A
higher rate discouraged and lower rate encourages bank loans ad hence credit expansion. Thus is
regulates and controls the volume of purchasing power in the economy for carrying on economic
activities.
(ii) Open Market Operations: The Central Bank buys or sells, as the need may be,
Government securities in the open market. By purchasing the securities it adds to the balances of
commercial banks with itself and by selling them it reduces such balances. Balances with the
Central Bank being as good as cash, such operations expand and restrict respectively the power
of commercial banks to create credit when they sell or buy such securities.
(iii) Variable Reserve Ratios: The Central Bank requires a certain percentage of the liabilities of
commercial banks (or member banks) to be kept in form of reserves with it under the law. This
ratio can be increased when credit contraction is desired and decreased when the object is to
expand credit.
(iv)Credit Rationing: The Central Bank may put limits on the issue of credit (overall or for
particular purposes) on the part of the member banks. These limits may be increased or
decreased as needed by the monetary situation in the country.
(b) QUALITATIVE CONTROL
It includes following.

(i) Moral Suasion: Central Bank through direct advice or persuasion may influence the banks to
follow particular lines of policy considered necessary to meet a particular situation.
(ii) Consumer Credit Regulation: In times of inflationary pressure the Central Bank may put
restrictions on loans to consumers. If consumption needs encouragement the Central Bank may
allow commercial banks to advance loans for consumption.
(iii) Publicity: This method is used usually accelerating the pace of economic development. This
implies issuing of weekly statistics, periodical reviews about money market conditions, public
finance, trade, industry, weekly balance sheet etc for the information of commercial banks, this
convincing them of the desirability of following particular lines of policy.
(iv) Variable Margin Requirements: Margin requirements may be increased if the object is to
discourage, and decreased if the aim is to encourage credit only for speculative activities in the
stock exchange.

(v) Direct Action: This method is used by Central Bank usually to rediscount bills of banks
following policies which are inconsistent with the Central Banking policy. This method is rarely
used and only as last resort.
To be fully effective in achieving their aims these methods pre-suppose a well-developed money
market which is sensitive to the actions taken by the Central Bank. If there is a large nonmonetized sector and net of banking institutions is not wide enough to cover the country, or there
is absence of organized banks prepared to cooperate in the national interest monetary policy will
face difficulties in achieving its objectives.
Role of Monetary Policy
Now-a-days the monetary policy is very important both for the developed as well as for the
developing countries. We can have the idea about the role of monetary policy for the developing
countries like Pakistan from the points explained below.
1. The under-developed countries are aimed at a balanced economic growth, particularly they
want to develop their backward regions and utilize the labor, capital and other natural resources

at their disposal in a best way. For this purpose monetary policy can be helpful to us. As the
loaning facilities to backward regions can be extended, the cheaper credit may be made available
to the preferred regions and sectors, and more loans at cheaper rates for neglected areas can also
be provided to start the process of economic development.
2. The economic development of a country depends upon technical changes, inventions and
innovations and discovery of new models etc whether they have been imported of formulated at
domestic level. Accordingly, monetary policy has to play its role for the sake of technical
progress and inventions etc. As the producers who want to produce new goods can be provided
the credit at soft conditions. In this way the process of development can be started.
3. The economy which is engaged in the process of economic development is in need of more
capital so that the transaction of goods and services could easily be facilitated. The availability of
more money will put to an end the non-monetized sector in the poor countries. The backward and
self-sufficient life of villages will come to an end.
4. Economic growth and industrial growth are compulsory to each other. The industrial growth
can be possible if loans are provided in a greater amount. The entrepreneurs with greater funds
would utilize the resources and produce more goods. The availability of loans can be made
possible through money and capital market. The monetary policy can be helpful in establishing
the monetary institutions.