Bangladesh Bank: Functions, Credit Control Methods, and Policies

This assignment delves into the role and functions of Bangladesh Bank as the central bank of the country. It begins by defining a central bank and its importance in maintaining economic stability, managing monetary policy, and regulating commercial banks. The assignment then outlines the specific functions of Bangladesh Bank, including managing deposit insurance, foreign exchange regulations, credit information, and international reserves. Furthermore, it explores the mechanisms used by Bangladesh Bank to control credit, categorizing them into quantitative and qualitative methods. Quantitative methods include bank rate adjustments, open market operations, and variable cash reserve ratios, while qualitative methods encompass credit rationing, direct action, moral persuasion, and consumer credit regulations. The analysis highlights the objectives and impact of these credit control measures on the economy, aiming to prevent inflation, stabilize the exchange rate, and foster economic growth.

SHOFI UDDIN SHEIKH
18THM036
Question no.-1: What is the Central Bank ? What are the functions of Bangladesh Bank
being a Central Bank of the country?
Answer
A central bank is a state institution that usually has the power to regulate commercial banks,
create monetary policy, and provide financial services. They help stabilize the currency of the
nation , prevent inflation, and keep unemployment low.
Central bank were established as a bulwark against financial crisis. As the institution that
controls a nation`s monetary policy, central banks have the ability to both boost and slow the
growth of the economy.
According to Mr. Rakibul Islam(lecturer of BSMRSTU), Central Bank is apex regulatory body
for the country`s monetary and financial system. Central Bank monitors controls and supervises
the banking system of a country.

The functions of Bangladesh Bank being a Central Bank of the country: Every central bank
has some functions which makes it known as central bank. Bangladesh Bank will be known as
Central Bank only when it follows the below mentioned functions. The major functional areas
include:
 Managing a deposit insurance scheme
 Implementation of the Foreign exchange regulation Act
 Collection and furnishing of credit information
 Money Laundering Prevention
 Acting as banker of the government
 Regulation and supervision of the payment system
 Issuance of currency notes
 Management of the country`s international reserves
 Formulation and implementation of monetary and credit policies
 Regulation and supervision of banks and non-bank financial institutions, promotion and
development of domestic financial markets.
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Question no.-2: "How does Bangladesh Bank control the credit? Explain"
Answer
Credit control refers to the ability of a commercial bank to create credit by the central bank. In
other words, it is a strategy used by the central bank to limit the amount of loans in the economy
to the desired level. The central bank alone has the power to control this credit.
We can also say that Credit Control is a function performed by the Central Bank (Reserve Bank
of India), to control the credit, i.e. demand and supply of money or say liquidity in the economy.
With this function, Central bank regulates the credit granted by the commercial banks to its
customers.
Purpose of credit control:
Credit control is needed to keep the country's economy afloat and achieve its goals. One of the
responsibilities of the central bank is to keep the lending activities of commercial banks within a
certain range. The following purposes are generally controlled;
 Bringing stability to the exchange rate
 To keep the stability of commodity prices in favor of the common man
 Providing employment opportunities and improving the economic condition of the
country
 Improving the quality of life
 To prevent inflation

Way to credit control of Bangladesh Bank:
The central bank has taken various measures for credit control and they are highlighted below:
1. Quantitative or General Methods
i. Bank Rate
ii. Open Market Operations
iii. Variable Cash Reserve Ratio
2. Qualitative or Selective Methods.
i. Rationing of Credit.
ii. Direct Action.
iii. Moral Persuasion.
iv. Method of Publicity.
v. Regulation of Consumer’s Credit.
vi. Regulating the Marginal Requirements on Security Loans.
1. Quantitative or General Methods
i. Bank Rate:
The interest rate at which commercial banks borrow from the central bank or deduct first class
bills or securities is called the bank rate.
The rate at which commercial banks borrow from the central bank at interest or discount first
class bills or securities is called the bank rate. The central bank's strategy of controlling credit by
increasing or decreasing this rate is called bank rate policy.
ii. Open Market Operations:
The policy by which the government controls credit by buying and selling bonds, securities,
shares, etc. in the open market is called open market policy.
An open market operation is an action by a CB(Central Bank) to take fluidity in its currency to a
bank or a group of banks. The CB can either buy or sell government bonds in the open market or,
in what is now mostly the preferred solution, enter into a secured lending transaction with a
commercial bank: the CB gives the money as a deposit for a certain period and en-bloc takes an
eligible asset as collateral.
This process of credit control is used in 2 senses:
 In the narrow sense—the CB starts the purchase and sale of Government securities in the
money market.

 In broad sense—the Central Bank purchases and sale not only Government securities
but also of other proper and eligible securities like bills and securities of private
concerns.
iii. Variable Cash Reserve Ratio:
In this process the CB controls credit by changing the CRR(Cash Reserves Ratio). For example
—If the Commercial Banks have obsessive cash reserves on the basis of which they are creating
a lot of credit which is detrimental for the larger interest of the economy. So it will enhance the
cash reserve ratio which the Commercial Banks are required to maintain with the CB.
This activity of the CB(Central Bank) will force the Commercial Banks to curtail the creation of
credit in the economy. In this way by enhancing the cash reserve ratio of the Commercial Banks
the CB(Central Bank) will be able to put an effective check on the inflationary expansion of
credit in the economy.
2.Qualitative or Selective Methods.
The qualitative or the selective methods or process are conducted towards the divergence of
credit into especial uses in the economy. Their objective is mainly to control and wield the flow
of credit into particular businesses or industries.
The methods of credit control under selective method are:
i. Rationing of Credit:
In this process the credit is rationed by limiting the quantity available to every client. The Central
Bank sets up restrictions on demands for accommodations made upon it during times of
monetary stringency.
ii. Direct Action:
In this process if the Commercial Banks don`t follow the policy of the CB(Central Bank), then
the CB has the only possessed to direct action. This system can be used to enact both
quantitatively and qualitatively credit controls by the Central Banks. This process is not used in
incoherence; it is used as a supplement to other process of credit control.
iii. Moral Persuasion:
This process is frequently accepted by the Central Bank to exercise control over the Commercial
Banks. In this process CB delivers counsel, then petition and persuasion to the Commercial
Banks to co-operate with the CB(Central Bank) is implementing their credit policies.

iv. Method of Publicity:
In current times, Central Bank in order to make their policies fruitful, take the course of the
medium of publicity. A policy can be effectively fruitful only when an useful public opinion is
created in its favors.
v. Regulation of Consumer’s Credit:
In this process clients are given credit in a little quantity and this period is fixed for eighteen
months; consequently credit creation elongated within the limit. This method was originally
obtained by the U.S.A. as a conservative and defensive measure, there after it has been used and
accepted by various other countries.
vi. Changes in the Marginal Requirements on Security Loans:
This is mostly followed in U.S.A. Under this process, the Board of Governors of the Federal
Reserve System has been given the potency to prescribe margin requirements for the purpose of
mitigating an excessive use of credit for stock exchange speculation. Bangladesh Bank also
follow it.
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