Direct action, Managerial Economics

Direct Action

Direct action in more than one from has been employed by the central banks either as an alternative to their discount rate policy or open market operations or together with both these methods. In wider sense, direct action includes moral suasion and there are many economists who do not make distinction between the two. However it is desirable to make a clear distinction between moral suasion and direct action, the latter term indicating only such coercive measures as the refusal to rediscount or grant further rediscount facilities to the defaulting banks. Direct action in the sense of refusing rediscount facilities on the part of the central bank to those banks whose credit policy was not conducive to the maintenance of sound credit conditions was given great prominence in America by the federal reserve system during the 19238-29 slump. The reserve bank of India has recently made use of direct action in the form of selective credit control. For the first time the bank issued a directive to banks 17 may 1956 to refrain from excessive lending against commodities in general or forbidding the bank to grant credit in excess of Rs. 50,000 to individual parties against paddy and ride. This was done in order to check speculation and stockpiling of essential goods to bring down their prices and to prevent them from rising further. As result of this directive advances against paddy and ride fall from Rs.26crores in April 1956 to Rs.4crores in October 1956. By another directive issued in September 1956, the scheme of selective credit control was extended to apply to wheat and other food grains. In June 1958 by another directive the commercial banks were further instructed to bring down the amount of their advances against food grains. Subsequently, a spate of directives has been issued from time to time by the reserve Bank of India to the commercial banks forbidding them to grant credit or to grant credit in a prescribed manner and for prescribed purpose.

Direct action as a method of credit control suffers, however from certain drawbacks. Dwelling upon the difficulties of success of direct control as a method credit regulation De kock has stated. There are however several limitations to be reckoned with namely, the difficulty for both central and commercial banks to make clear cut distinction at all times and in all cases between essential and non essential industries, productive and unproductive activities, investment and speculation or between legitimate and excessive speculation or consumption the further difficulty of controlling the ultimate use of credit by second, third or fourth parties, the dangers involved in the division of responsibility between the central bank and the commercial banks for the soundness of the lending operations of the latter and the possibility of forfeiting the wholehearted and active co operation of the commercial banks as a result of undue control and intervention.

Posted Date: 12/1/2012 7:17:41 AM | Location : United States

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