Ag.

Ag.Econ.
Econ.608
608
Credit
Creditadjustment
adjustment

Presented to:
Presented to: Presented By:
Dr. Janailin. S. Papang Presented By:
Dr. Janailin. S. Papang ROHIT
(Deptt. of Agricultural ROHIT
(Deptt. of Agricultural (PhD Extension Education)
Economic) (PhD Extension Education)
 Overview
Overviewof
ofthe
thePresentation
Presentation
1.1. Definition of credit adjustment
Definition of credit adjustment
2.2. How
HowCredits
CreditsAdjustment
Adjustmentworks
works
3.3. Special
SpecialConsiderations
Considerations
4.4. Terms
Termsrelated
relatedtotoCredit
Credit
Adjustment
Adjustment

1
Definition of Credit Adjustment
Definition of Credit Adjustment
 The term credit adjustment refers to a short-term loan extended
 The term credit adjustment refers to a short-term loan extended
by a Central bank to a smaller commercial bank when it needs to
by a Central bank to a smaller commercial bank when it needs to
maintain its reserve requirements and support short-term lending.
maintain its reserve requirements and support short-term lending.
 Credits Adjustment are a common form of borrowing between
 Credits Adjustment are a common form of borrowing between
commercial banks and Central Bank.
commercial banks and Central Bank.
 A commercial bank secures an adjustment of credit with a
 A commercial bank secures an adjustment of credit with a
promissory note, often using them when interest rates are high,
promissory note, often using them when interest rates are high,
and the money supply is short.
and the money supply is short.
 An adjustment of credit is normally extended for a very short
 An adjustment of credit is normally extended for a very short
period of time usually overnight.
period of time usually overnight.

https://www.investopedia.com/terms/a/adjustment-credit.asp
https://www.investopedia.com/terms/a/adjustment-credit.asp 2
How Adjustment Credits Work
How Adjustment Credits Work
 A commercial bank must maintain reserve requirements as set
 A commercial bank must maintain reserve requirements as set
by the central bank’s board of governors.
by the central bank’s board of governors.
 Reserve requirements are considered one of the three main
 Reserve requirements are considered one of the three main
tools of monetary policy, along with open market operations
tools of monetary policy, along with open market operations
and the discount rate.
and the discount rate.
 Open market operations are the purchasing and selling of
 Open market operations are the purchasing and selling of
securities in the open market to expand or contract the amount
securities in the open market to expand or contract the amount
of money in the banking system and help control inflation.
of money in the banking system and help control inflation.
 The discount rate is the interest rate charged to commercial
 The discount rate is the interest rate charged to commercial
banks for loans taken from the central reserve bank. It also
banks for loans taken from the central reserve bank. It also
serves to influence the money supply and inflation.
serves to influence the money supply and inflation.

https://www.investopedia.com/terms/a/adjustment-credit.asp 3
https://www.investopedia.com/terms/a/adjustment-credit.asp
 A commercial bank's reserve amount—held either in its own
 A commercial bank's reserve amount—held either in its own
vaults or with the closest Reserve Bank—reflects the total
vaults or with the closest Reserve Bank—reflects the total
amount of deposits held on behalf of its customers.
amount of deposits held on behalf of its customers.
 The reserve requirement assures customers that their money will
 The reserve requirement assures customers that their money will
always be available upon request.
always be available upon request.
 Reserves protect banks if customers decide to make large
 Reserves protect banks if customers decide to make large
withdrawals en masse.
withdrawals en masse.
 When a bank's reserves are low, they can turn to the Federal
 When a bank's reserves are low, they can turn to the Federal
Reserve to make up the difference through an adjustment credit.
Reserve to make up the difference through an adjustment credit.
An adjustment credit is a type of short-term loan that allows a
An adjustment credit is a type of short-term loan that allows a
bank to continue lending to its customers.
bank to continue lending to its customers.

https://www.investopedia.com/terms/a/adjustment-credit.asp 4
https://www.investopedia.com/terms/a/adjustment-credit.asp
 A commercial bank secures this loan by using a promissory note
 A commercial bank secures this loan by using a promissory note
—a financial instrument that details a written promise by the
—a financial instrument that details a written promise by the
issuer to pay the lender a definite sum of money. So by using the
issuer to pay the lender a definite sum of money. So by using the
note, the bank promises to repay the Central Reserve Bank the
note, the bank promises to repay the Central Reserve Bank the
amount of money it borrows.
amount of money it borrows.
 Payment can be specified either on-demand or at a set future
 Payment can be specified either on-demand or at a set future
date, and typically contains all the terms pertaining to the
date, and typically contains all the terms pertaining to the
indebtedness, such as the principal amount, interest rate, 
indebtedness, such as the principal amount, interest rate, 
maturity date and place of issuance, and issuer's signature.
maturity date and place of issuance, and issuer's signature.
 As noted above, commercial banks often use adjustment credits
 As noted above, commercial banks often use adjustment credits
when interest rates are high and the money supply is short.
when interest rates are high and the money supply is short.
Higher interest rates require larger payouts on customer deposits,
Higher interest rates require larger payouts on customer deposits,
while a short supply of money requires additional float to
while a short supply of money requires additional float to
perpetuate bank operations.
perpetuate bank operations.

5
Special
SpecialConsiderations
Considerations
 An adjustment credit is just one of the options available to
 An adjustment credit is just one of the options available to
commercial banks under the Federal Reserve's Regulation A,
commercial banks under the Federal Reserve's Regulation A,
which provides guidance and rules about how institutions can
which provides guidance and rules about how institutions can
borrow from the Fed's discount window. The other two options
borrow from the Fed's discount window. The other two options
are:
are:
• Extended credit: This option is available when a bank can't
• Extended credit: This option is available when a bank can't
secure a loan from another source, such as another bank.
secure a loan from another source, such as another bank.
Extended credits are granted for longer periods of time than
Extended credits are granted for longer periods of time than
adjustment credits.
adjustment credits.
• Seasonal credit: This type of credit is granted to smaller
• Seasonal credit: This type of credit is granted to smaller
institutions that have a bigger need at certain periods of time of
institutions that have a bigger need at certain periods of time of
the year.
the year.

https://www.investopedia.com/terms/a/adjustment-credit.asp 6
https://www.investopedia.com/terms/a/adjustment-credit.asp
Terms
Termsrelated
relatedtotocredit
creditadjustment
adjustment
 Key Rate The key rate is a benchmark interest rate that
 Key Rate The key rate is a benchmark interest rate that
determines bank lending rates and the cost of credit for
determines bank lending rates and the cost of credit for
borrowers
borrowers
 Monetary Policy Monetary policy is a set of actions available
 Monetary Policy Monetary policy is a set of actions available
to a nation's central bank to achieve sustainable economic
to a nation's central bank to achieve sustainable economic
growth by adjusting the money supply
growth by adjusting the money supply
 Federal Funds Rate The federal funds rate is the target
 Federal Funds Rate The federal funds rate is the target
interest rate set by the Fed at which commercial banks borrow
interest rate set by the Fed at which commercial banks borrow
and lend their excess reserves to each other overnight
and lend their excess reserves to each other overnight
 Discount Rate the interest rate that the Federal Reserve
 Discount Rate the interest rate that the Federal Reserve
charges banks for short-term loans, but it's also used in future
charges banks for short-term loans, but it's also used in future
cash flow analysis
cash flow analysis

https://www.investopedia.com/terms/a/adjustment-credit.asp 7
https://www.investopedia.com/terms/a/adjustment-credit.asp
THANKS….