Credit control

Definition

Credit control is a plan employed by manufacturers and retailers to help good credit among the
creditworthy and deny it to criminal borrowers. This will both boost sales and decrease bad
amount outstanding, thus improving a company's cash flow

The role of a credit controller

There are two major branches you can follow: profitable credit, where you'll deal with business
customers or customer credit where you'll be trade with the public. Your main duties will
incorporate. There should be a close liaison between the credit manager and the marketing /sales.

 Credit control procedures.

 Create a clear credit control process.
 Research your customers.
 Maintain a positive relationship.
 Invoice quickly and accurately.
 Encourage early payment.
 Compile a watch list and take action.
 Credit control objectives

Objectives of credit control.

Ensure an adequate level of liquidity sufficient to attain high economic growth rate along with
maximum use of resource but without generating high inflationary force. Attain stability in the
exchange rate and wealth market of the country.

Techniques of Credit Control

The top four techniques of credit control adopt by central bank. The technique are:

1. The Bank Rate

2. Open Market Operations

3. Variable Reserve Ratio

4. Selective or Qualitative Methods of Control

The Bank Rate:

A commercial bank’s purchaser gets money by discounting eligible bills of replace or other
commercial papers from it. in the same way, a commercial bank gets cash by rediscounting bills
from the middle bank. Bank rate is the minimum lending rate of the middle bank at which it
rediscounts bills. By turning the bank rate screw the central bank can increase or reduce the
volume of credit.

Suppose, commercial banks have decided to start more discounting of bills to earn maximum
income. More and more discounting of bills funds an increase in the volume of credit. If the
central bank in the significance of the state thinks that this is detrimental, it will raise the bank
rate.

business banks will also raise their own rates of interest. therefore, people will take fewer loans
and advances.

Once bank rate is raise, commercial banks’ demand for central bank money by discount bills will
decline. This, in fact, will decrease credit-creating powers of the saleable banks. Further, a higher
bank rate means higher short term interest rates.

Thus high bank rate deter borrowers from borrowing and, hence, demands for credit decline.
Opposite run of events come into play when bank rate is lower down. That is to say, credit
command rises (falls) once the bank rate is reduced (increased).

Bank rate influences provide or cost of credit. There is a rigid association between the bank rate
and other small term rates of interest charged by commercial banks. A rise (or fall) in bank rate
is accompany with a rise (or fall) in marketplace rates of interest. This results in greater than
before (or lower) cost of credit which would decrease (or increase) credit supply.
Limitations:

Successful performance of bank rate operation depends on two situation:

i. There must be a close and direct connection between bank rate change and other short term
interest rates; and

ii. Money market and money market must be developed.

2. Open Market Operations:

By open market operation we mean purchase and sale of securities in the open marketplace by
the central bank on its own program. Thus, OMO consists of two types: open market buy, and
open market sale.

When the central bank purchase government securities in the open market, cash flows out from
the pouch of the central bank to the seller of securities (who may be commercial banks, non-
banking financial mediators, general public, etc.

In other terms, the central bank injects more cash in the economy by conduct open market
purchase policy. in the same way, when the central bank sells securities in the release market,
commercial banks, community and non-banking financial institution pay money to the central
bank for the purchase of securities.

As a result, the government’s relation with the central bank goes up by the value of securities
sell. In other words, open market sale policy is conduct by the central bank to draw off the
money provide. Thus, like bank rate, OMO is also a double-edged stick—open market purchase
policy is adopt during deflation and open marketplace sale policy at the time of inflation.

3. Variable Reserve Ratio:

Commercial banks are necessary by law or by meeting to keep a part of their deposit with the
central bank as funds. This is called legal least amount cash reserve ratio (CRR). If the
commercial banks have excess funds, an increase in CRR will reduce their lend potential.

On the other hand over, whenever CRR is reduced, the commercial bank system acquires extra
reserves than before which make an growth of credit possible. Thus, the difference in CRR is
also a double-edged weapon. This method, compared to other instrument of control, puts direct
possible pressure on commercial banks in the pet direction.

4. Selective or Qualitative Methods of Control:

The aforementioned quantitative methods are known as universal methods of the credit control
since a modify of these instruments in any way affect the entire economy. But, undersized
countries knowledge fluctuations in economic behavior in a particular sector or collection of
sectors. below the circumstances, these exacting sectors of the economy order control and
regulation.

Qualitative or careful methods of control are better in this way since these put pressures only on
certain sector of the economy, without adaptable the flow of credit to the unchanged sectors.
Hence the name selective credit control. From this position of view, quantitative methods may be
selected as a general therapy while selective method as a local analysis.

Monetary Policy: Pakistan

As the central bank of the state, the State Bank of Pakistan has been entrust with the
responsibility of adaptable “the monetary and credit organization of Pakistan and to foster its
growth in the best public interests with a view to secure monetary stability and fuller use of the
country’s forceful resources”*. The daily jobs and function of the State Bank below the interest-
free system will stay generally the similar as at present. It would continue to perform all the
functions of a modern central bank including the ’sue of currency notes, rule of money and
credit, financier and adviser to the management, and the ultimate cistern of liquidity for the
monetary and banking system.