Central bank acts as the lender of the money market, supervises controls and regulates the activities of commercial banks and financial institutions. A central bank is a bank which leads all banks and control money supply in the money market. In modern economies, the central bank is usually responsible for the formulation of monetary policy and the regulation of member banks.
Regulation of credit is one of the important functions of the central bank. On behalf of the central bank, positioning as a guardian of money market central bank executes the duty of regulating credit. For the following purposes central bank regulates credit:
(1) Establishing stability in the money supply: Keeping stability in the money supply is the precondition of economic stability. For this purpose, a central bank takes different steps such as drafting and implementing monetary policy and fiscal policy.
(2) Stabilization of Price: Stable price level is very important for economic development the price level of goods fluctuates repeatedly, it hampers economic development. Changing price level creates uncertainty and brings about an unscrupulous shadow on production. To keep this price in stable condition, central bank regulates credit.
(3) Stabilization of exchange rate: Repeated change in exchange rate affects foreign business. To increase foreign business govt. should keep the external value of a currency in a stable. By regulating credit external value of a currency can be kept in a stable.
(40 Maintaining a favorable balance of payment: Both inflation and deflation influence the international business and create unfavorable condition and imbalance. To maintain a favorable balance of payment, the central bank should increase or decrease the money supply and credit condition as when it is required.
(5) Checking inflation: For the Third World countries, inflation is a big problem. Central bank Controls the inflation rate by regulating credit. To keep price level in stable condition, controlling inflation rate is very important.
(6) Ensuring employment: In developed countries to ensure full employment opportunity, regulation of credit is insured. For the development of the industrial sector, they sanction the appropriate loan amount. Timely credit sanction helps to establish a new industry which creates employment opportunity.
(7) Equal distribution of wealth: Central bank should regulate the credit in such a way so that all sectors production and all classes of people are benefitted from it. For this central bank should identify the weaker sectors and sanction loan. Alongside this; central bank should also be careful so that no particular person or class of people can accumulate a huge sum by getting credit an illegal way.
(8) Development of standard of living: Another purpose of regulating credit is to develop the standard of living by economic development. By regulating credit central bank increases per capita income.