Monetary Policy – Qualitative Instruments to control money supply

Selective or Qualitative methods of credit control aim at regulating and controlling the allocation of credit among various users rather than influencing the general availability of credit.

These are broadly explained below:

1) Margin Requirement:

The commercial banks generally give loans to their customers against some securities. They do not give loans equal to the full amount of the value of security, but of an amount which is less than its value.

The margin requirement of loans refers to the difference between the current value of the security offered for loans and the value of loans granted.

For Example: If Central bank fixes a margin requirement of 10 % against the security of an article (for ex: land, food grains, home etc) the person can borrow Rs. 9,000 against the article valued at Rs. 10,000.

Now, if the flow of credit is to be restricted, the Central bank will raise the margin requirement.And if the Central bank wants to expand credit, it reduces the margin requirement.

2) Credit Rationing:

Rationing of credit refers to fixation of credit quotas for different business activities. It aims at limiting the maximum (ceiling) of total amount of bank loans and advances as well as, in certain cases, fixing the maximum limit of loans for specific purposes.

Rationing of credit is introduced when the flow of credit is to be checked particularly for speculative activities in the economy. The commercial bank cannot exceed the quota limits while granting loans.

Depending upon the economic emergencies, the Central bank may increase or decrease the ceiling of the bank credit and thereby increase or decrease the power of the commercial banks to create credit.

3) Moral Suasion:

Moral Suasion is the method of persuasion, request, informal suggestion and advice to the commercial banks by the Central bank.

It is a combination of both “persuasion” and “pressure”. The Central bank tries to persuade the commercial banks to follow its directives of monetary policy. Otherwise, it can pressurize them to follow its policy directives.

The member banks generally do not ignore the advice of the Central bank. The banks are advised to restrict the flow of credit during inflation And be liberal in lending during deflation

4) Regulation of Consumer credit:

It aims at regulating the consumer instalment credit on hire purchase finance. Hire purchase finance is the method of using bank credit by the consumer to buy expensive durable consumer goods like car, house etc.

In this certain percentage of the price of the durable good is paid by the consumers as the cash- down payment and the remaining portion of the price is financed by the bank credit (consumer pay it in form of instalments for a specified period of time).

Now, if the Central bank wants to reduce the availability of credit (at the time of inflation), it raises the amount of down payment and reduces the maximum period of repayment.

And, if the Central bank wants to increase the availability of credit (at the time of deflation), it reduces the amount of down payment and increase the maximum period of repayment.

5) Direct Action: The Central bank may initiate direct action against the member banks in case these do not comply with its directives. The Central bank can use direct action which includes derecognition of a commercial bank.

6) Publicity: The Central bank expresses its views about various monetary and banking policies. It may put forward its views by using facts and figures through the media of publicity.