List and explain five methods used by the Central Bank to control the activities of the commercial banks.

Answer Details

Five methods used by the Central Bank to control commercial banks

1. Open Market Operations (OMO): The Central Bank buys or sells government securities in the open market. Selling securities mops up cash from the banks and reduces their ability to lend, while buying them increases the banks' cash and lending power.
2. Bank Rate (Discount Rate) policy: This is the rate at which the Central Bank lends to commercial banks. Raising the bank rate makes borrowing costlier and discourages lending; lowering it encourages lending.
3. Cash Reserve Ratio (CRR): The Central Bank fixes the proportion of a bank's total deposits that must be kept with it as reserves. Raising the ratio reduces the funds available for lending, and lowering it increases them.
4. Liquidity Ratio: This prescribes the minimum proportion of a bank's assets that must be held in liquid form. A higher liquidity ratio limits the amount available for credit creation.
5. Special Directives and Moral Suasion: The Central Bank issues instructions and appeals to banks to expand or restrict credit to particular sectors in line with government policy. It may also use selective credit control to steer lending.