Adjustment credit can be categorized as a kind of small loan. This kind of loan is a short term loan that is declared from a Federal Reserve Bank to a small commercial bank. The major objective and the advantage of this type of loan is that it is helpful in maintaining the reserve of the funds for the small commercial bank. Moreover this kind of loan also supports short term lending. Adjustment credit is a very common type of borrowing that small commercial banks make from the large federal bank. The major reason behind this borrowing is that when the small commercial bank is suffering from low credit or low fund reserve and the interest rate is high as compared to the supply of the money.
This is mandatory for the small commercial banks to maintain some of the money in reserve so that they can assure their customers that the money will be readily available on the customer request. If the reserves of a bank are low that customers won’t trust the bank as a result the bank can lost its credibility as well as customer interest. When the reserve of the bank is low the adjustment credit allows the bank to borrow reserve of money from the Federal Reserve Bank so that all the functions of the small commercial bank can run without any friction. The loans borrowed from the Federal Reserve Bank are secured by the promissory notes issued by the small commercial banks.
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