Qualitative Method of Monetary Policy

Introduction

• Qualitative methods control the use and direction of credit and discriminate between various sectors of the economy. 
• They direct the credit flow for particular end use and particular sectors of the economy. 
• Unlike quantitative tools which have a direct effect on the entire economy’s money supply, qualitative tools are selective tools that have an effect on the money supply of a specific sector of the economy.

Instruments of Qualitative Method

Credit Rationing: 

• Under credit rationing, RBI fixes a ceiling (maximum limit) on loans and advances of various categories, which the commercial banks cannot exceed. 
• This controls the amount of credit for certain sectors and ensures that all sectors get adequate credit. This is required for inclusive growth of all sectors of the economy.

Changing Margin Requirements: 

• Margin is the amount that has to be contributed by the borrower for availing any loan. The full amount of the loan is not given; rather the borrower has to contribute some sum as margin. If the margin is high, then off-take of the loan is low and vice-versa. 
• RBI controls credit by fixing high margins. This is aimed to restrict the use of credit for purchasing securities by speculators.

Regulating Consumer Credit: 

• Consumer credit refers to loans taken by the public for purchase of goods and services. 
• RBI regulates this by either fixing a minimum time frame for repayment or increasing down payment required for availing loan.

Moral Suasion: 

• RBI uses persuasion and request, giving suggestions and advice to commercial banks to undertake certain actions in the economic interests of the country. 
• The advice is morally binding, but not mandatory for the banks.