Question

Give reasons "A Central Bank may take 'Direct Action' against the defaulting commercial banks".

Answer 1

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$\bf{QUESTION}$

Give reasons "A Central Bank may take 'Direct Action' against the defaulting commercial banks".

▶ CENTRAL BANK IS THE HEAD OF ALL BANKS

▶ IT ISSUES THE RATE OF LONES GIVEN AT INTERESTS

▶ IT HAVE RIGHT TO TAKE NECESSARY ACTIONS ON ANY OTHER LOCAL BANKS IF IT IS NOT FOLLOWING RULES.


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Answer 2

"A Central Bank may take 'Direct Action' against the defaulting commercial banks". The reasons behind the same are as follows:

Explanation: It refers to the quantitative credit control method used by the Central Banks to convince the commercial banks to act as per the directions. Under this method, commercial banks are being influenced using outright force known as direct action during the flow of credit in the market.

In simple terms, as per this method, central bank hold meetings with the commercial banks and directs them to follow general monetary policy for the economic interest of the country as a whole. In case of failure, direct action can be taken against them in the form of cancellation of license etc.

INFLATION SITUATION:

Under this situation, central bank directs the commercial banks not to advance loan in the market in order to reduce the flow of money, thereby, reduction in the demand and control of inflation situation.

DEFLATION SITUATION:

Under this situation, central bank directs the commercial banks to advance loan in the market in order to increase the flow of money, thereby, increase in the demand and control of deflation situation.

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