Moral suasion
Topic: Banking, Credit Creation and Monetary Policy · NCERT: Class 12, Ch 3 "Money and Banking"
Meaning
Moral suasion is the central bank persuading commercial banks to act in a certain way, without passing any legal order. RBI uses letters, meetings and public statements to encourage or discourage certain kinds of lending. It is a qualitative tool of monetary policy. It works because banks value their relationship with their regulator.
Example
RBI has used moral suasion to press banks to pass on repo rate cuts to borrowers faster. It has also urged banks to be careful about fast-growing unsecured loans.
Don't confuse with
- Direct action: here RBI imposes penalties or restrictions on the business of banks that do not comply. Moral suasion only persuades. Direct action compels.
Related concepts
- Qualitative tools of monetary policy
- Margin requirement
- Priority sector lending
- Macroprudential policy
- Financial stability