MONEY AND BANKING PART 09
INSTRUMENTS OF MONETARY POLICY Monetary policy instruments are of 2 different types. GENERAL OR QUANTITATIVE METHODS 2. SELECTIVE OR QUALITATIVE METHODS
QUALITATIVE METHOD The qualitative method or selective method are adopted by the central government to affect the use, distribution and direction of credit. It encourages the ones that are desirable and discourages the ones that are undesirable. They do not direct the use of credit but discriminate between the uses of credit.
RBI has 7 different qualitative instruments 1. Credit rationing 2. Margin of requirements 3. Regulation of consumer credit 4 Control through directives 5. Moral suasion 6. 7. Publicity Direct action
CREDIT RATIONING In this method, RBI fixes a maximum ceing limit of advancing loans and grants to the commercial banks. This helps to regulate the purpose for which the loan is being advanced to the commercial bank. This is done in 2 ways: Variable capital asset rati0 : This ratio is fixed by central bank in relation to the capital of the bank to its total assets. 2. Variable portfolio ceiling : The central bank fixes ceiling limit, beyond which the commercial bank cannot get loans
MARGIN OF REQUIREMENT The margin refers to the "proportion of the loan amount which is not financed by the bank". Or in other words, it is that part of a loan which a borrower has to raise in order to get finance for his purpose. A rise in the margin requirement results in a contraction in the borrowing value of the security and similarly, a fall in the margin requirement results in expansion in the borrowing value of the security
REGULATION OF CONSUMER CREDIT Under this method, the central banks fixes a certain minimum amount of down payment and regulating the length of installment for the commercial bank, when a consumer wishes to purchase any consumer goods. During inflation, such regulations imposed to control the demand in the economy and during recession they are relaxed to increase the consumer demands.
CONTROL THROUGH DIRECTIVES RBI has the power to issue directives to the commercial banks relating to its lending policy, margin to be kept for loans, purpose for granting loans etc. This is done either by law or between mutual agreement between both the involved parties. It helps the flow of credit to certain desirable areas or to restrict it from undesirable areas.
MORAL SUASION The central bank often advises commercial bank on various issues so that the goals of the commercial banks are met along with the goals of central banks, keeping in view the best interest of the public Commercial banks are informed about the expectations of the central bank through a monetary policy The central bank issues directives, guidelines and suggestions for commercial banks regarding reducing credit supply for speculative purposes
PUBLICITY RBI regularly publishes statement of assets and liabilities of the commercial banks for the knowledge of the public. It also reports on the general market condition and the bank's status. It helps the commercial bak to direct the credit into productive channels. It also helps the public to be aware of the policies adopted by the banks.