Question
Briefly explain two qualitative methods of credit control adopted by this institution.
Solution
When credit control measures are imposed by the Reserve Bank of India (RBI) to check the flow of credit on the basis of its quality, i.e., on the basis of the repayment capability of the person who has taken the loan or on the basis of the purpose for which the loan is taken from commercial banks, they are called qualitative credit control measures. The RBI uses the following selective credit control instruments:
i. Margin money: This implies the minimum margin (30% of the loan amount) to be kept by the borrowers with commercial banks while borrowing money against specific securities from commercial banks. In case of secured or less risky loans, the margin money requirement is kept at a low level.
ii. Moral suasion: This is a mixture of both persuasion and pressure. The Central Bank makes an attempt to persuade commercial banks to follow its directives of monetary policy or it can pressurise them to follow its policy directives. When it fails to work, the Central Bank can use the direct action which includes nonrecognition of a commercial bank.
