Qualitative tools of monetary policy
Also called: Selective credit controls, Qualitative credit control, Credit rationing · Topic: Banking, Credit Creation and Monetary Policy · NCERT: Class 12, Ch 3 "Money and Banking"
Meaning
Qualitative tools of monetary policy steer the direction and purpose of credit, meaning who gets loans and for what. They do not set the total volume of credit. They include:
- Margin requirements: the share of a security's value that cannot be lent against.
- Credit ceilings: limits on lending to certain sectors.
- Selective credit controls: controls on lending against sensitive goods such as foodgrains, sugar and oilseeds.
- Moral suasion: persuading banks.
- Direct action: penalties on banks that do not comply.
Example
From 1956, under Section 21 of the Banking Regulation Act, RBI controlled bank loans against stocks of foodgrains and sugar. This stopped traders from hoarding these goods with borrowed money. These controls were largely dismantled after the 1990s.
Don't confuse with
- Quantitative tools: CRR, SLR, open market operations, the bank rate and the repo rate are general tools. They change the overall volume and cost of credit across the economy.