Qualitative Tools of Monetary Policy
Contents
Qualitative Tools of Monetary Policy
1 Types of Qualitative Tools
1.1 Credit Rationing
1.2 Loan to Value Ratio
1.3 Moral Suasion
1.4 Direct Action
2 Concept Check
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Qualitative Tools of Monetary Policy
Qualitative Tools of Monetary Policy
These tools help in ensuring that prudent practices are followed in the nancial sector, while also
ensuring that credit is channelized in the right direction.
Qualitative tools are direct and speci c in nature.
Qualitative tools include persuasion by the Central bank in order to make commercial banks
discourage or encourage lending which is done through moral suasion.
Qualitative also called selective credit control instruments work through regulation of margin
requirement, credit rationing, regulation of consumer credit and direct action.
1. Types of Qualitative Tools
1.1 Credit Rationing
Rationing of credit is another method of selective credit control. It is done by regulating the
purposes for which the loans are given among the various member banks. To ensure overall
development of a nation, development of various sectors is a must. Finance is to be
distributed to various sectors as per these requirements.
Priority sector should be given preference in lending loans.
For others, minimum attention only will be given in this respect. It paves way for the optimum
utilization of money.
1.2 Loan to Value Ratio
It is the amount of loan that is given against a xed value of collateral.
Loan-to-Value is calculated as follows: Financial institutions calculate LTV of a borrower using
given method: (Amount borrowed / Value of property) x 100 = LTV ratio in percentage
For example: Suppose a person wants to get a loan by mortgaging its gold worth Rs.1 lakh.
The LTV is 60%, then the amount of loan the person will receive is Rs. 60,000.
By using this method, during the period of in ation with a view to control credit, the RBI lowers
the LTV Ratio and during de ation it raises the LTV to expand the credit.
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Qualitative Tools of Monetary Policy
1.3 Moral Suasion
Moral suasion aims at strengthening natural con dence and understanding between the
monetary authority and the banks as well as nancial institutions. It is not a statutory
obligation.
Moral Suasion is just as a request by the RBI to the commercial banks to take certain actions
and measures as per the trend of the economy.
RBI may request commercial banks not to give loans for unproductive purpose which does not
add to economic growth but increases in ation.
1.4 Direct Action
This step is taken by the RBI against banks that don’t ful ll conditions and requirements.
RBI may refuse to rediscount their papers or give excess credits or charge a penal rate of
interest over and above the Bank rate, for credit demanded beyond a limit.
2. Concept Check
Q. Which one of the following is not an instrument of selective credit control in India?
(a) Regulation of consumer credit
(b) Rationing of credit
(c) Margin requirements
(d) Variable cash reserve ratios
(e) Direct Action
Answer: D
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Qualitative Tools of Monetary Policy
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