This method was first introduced by the Federal Reserve System in USA in august 1941, to regulate the terms and conditions under which credit repayable installments could be extended to the consumers for purchasing durable goods
Excess as well as insufficient demand for consumer goods like cares, TVs computers, furniture etc will disturb production. to avoid this problem consumer credit is regulated.
Under regulation of consumer credit rules regarding down payments and installments [Equated Monthly Installments - EMI] of credit repayment are specified in case of consumer’s loans on certain listed goods.
In order to check credit the central bank
will increase down payment and reduce the repayment time, therefore the EMI will increase.
Increase the rate of interest on consumer loans
This will discourage prospective buyers.
In order to increase credit the central bank
will reduce the down payment and increase the repayment time, therefore the EMI will decrease.
Reduce the rate of interest on consumer loans
This will encourage prospective buyers.
This method is very popular in advanced countries.
Recently the RBI has relaxed its guidelines and the commercial banks have the discretion to provide credit for consumer goods.