Page 51 - DCOM208_BANKING_THEORY_AND_PRACTICE

Banking Theory and Practice

Notes 3.5.2 Qualitative or Selective Methods

The tools used by RBI to govern the flows of credit into specific directions of the economy are
called qualitative or selective methods of credit control. Unlike the quantitative methods, which
affect the total volume of credit, the qualitative methods affect the types of credit extended by
the commercial banks; they affect the composition of credit rather than the size of credit in the
economy. The important qualitative or selective methods of credit control are:
Marginal Requirements: Every commercial bank has to keep a margin whenever it provides
loans against the security. It means that the amount of loan is lower than the real value of
security.

Example: Actual value of security is 100 and the amount of loan is 85, therefore margin
requirement is 15%.

Central bank can increase or decrease the supply of money by altering the requirements
of margin.
Example: If central bank wants to decrease the money supply it can do so by increasing
the margin requirements. In this way amount of loans decreases.
Regulation of Consumer Credit: Consumer credit facility refers to the act of selling a
consumer good on a credit basis to the customers. This tool is used by government or
Reserve Bank of India to enforce certain regulations on the goods that are sold on credit.
If the central bank wants to increase the money supply it can do so by adopting a lenient
policy about the credit for purchase of consumer goods. Similarly central bank can cut the
money supply by putting limitations on consumer credit.
Credit Rationing: Central bank uses credit rationing to fix the credit ceiling allowed for
each and every commercial bank.

Did u know? The central bank fixes the credit limit for each commercial bank and does not
give credit to them beyond that limit.
Whenever the RBI desires to cut the supply of money, it decreases the limit up to which it
can give loans to the member banks. Likewise, central bank can increase the money
supply by increasing the credit limit.
Moral Suasion: In some cases central bank morally persuades or requests the commercial
banks not to get involved themselves in such economic activities which are unfavourable
to the interest of the country. It regularly guides and proposes the member banks to
follow a specific policy for loans and abstain themselves from giving loan for speculative
purposes.

Direct Action: Direct action is the last option through which central bank takes a direct
action against the bank which does not act in conformity with the policy of Reserve Bank
of India. In case of direct action the central bank can impose fine and penalty and can deny
giving out loans to the commercial bank. Such type of force keeps commercial banks away
from unsought credit activities.

Publicity: Central bank also publishes details concerning its policies and important
information about assets and liabilities, credit and business situation etc. of commercial
banks. This facilitates commercial banks as well as general public to realize the monetary
needs of country. Central bank discloses some of the important information about the

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