4 qualitative measures of monetary policy

The qualitative measures do not regulate the total amount of credit created by the commercial banks. These measures make distinction between good credit and bad credit and regulate only such credit, which creates economic instability. Therefore, qualitative measures are known as the selective measures of credit control.

Qualitative credit control measures include:

(i) Prescription of margin requirements

(ii) Consumer credit regulation

(iii) Moral suasion

(iv) Direct action

(i) Prescription of margins requirements:

Generally, commercial banks give loan against ‘stocks or ‘securities’. While giving loans against stocks or securities they keep margin. Margin is the difference between the market value of a security and its maximum loan value. Let us assume, a commercial bank grants a loan of Rs. 8000 against a security worth Rs. 10,000. Here, margin is Rs. 2000 or 20%.

If central bank feels that prices of some goods are rising due to the speculative activities of businessmen and traders of such goods, it wants to discourage the flow of credit to such speculative activities. Therefore, it increases the margin requirement in case of borrowing for speculative business and thereby discourages borrowing. This leads to reduction is money supply for undertaking speculative activities and thus inflationary situation is arrested.

On other contrary, central bank can encourage borrowing from the commercial banks by reducing the margin requirement. When there is a grater flow of credit to different business activities, investment is increased. Income of the people rises. Demand for goods expands and deflationary situation is controlled.

Thus, margin requirement is a significant tool in the hands of central bank to counter-act inflation and deflation.

(ii) Consumer credit regulation:

Now-a-days, most of the consumer durables like T.V., Refrigerator, Motorcar, etc. are available on installment basis financed through bank credit. Such credit made available by commercial banks for the purchase of consumer durables is known as consumer credit.

If there is excess demand for certain consumer durables leading to their high prices, central bank can reduce consumer credit by (a) increasing down payment, and (b) reducing the number of installments of repayment of such credit.

On the other hand, if there is deficient demand for certain specific commodities causing deflationary situation, central bank can increase consumer credit by (a) reducing down payment and (b) increasing the number of installments of repayment of such credit.

(iii) Moral suasion:

Moral suasion means persuasion and request. To arrest inflationary situation central bank pursuades and request the commercial banks to refrain from giving loans for speculative and non-essential purposes. On the other hand, to counteract deflation central bank pursuades the commercial banks to extend credit for different purposes.

Central bank also appeals commercial banks to extend their wholehearted co-operation to achieve the objectives of monetary policy. Being the monetary authority directions of the central bank are usually followed by commercial banks.

(v) Direct Action:

This method is adopted when a commercial bank does not co-operate the central bank in achieving its desirable objectives. Direct action may take any of the following forms:

Central banks may charge a penal rate of interest over and above the bank rate upon the defaulting banks;

Central bank may refuse to rediscount the bills of those banks which are not following its directives;

Central bank may refuse to grant further accommodation to those banks whose borrowings are in excess of their capital and reserves.