Ans – (b)
Qualitative instruments of monetary policy include:
1. Margin Requirements
2. Moral Suasion
3. Selective Credit Controls
Moral Suasion:- This is a combination of persuasion and pressure that the Central bank applies on other banks in order to get them to act, in a manner, in line with its policy. Moral suasion is exercised through discussions letters, speeches, and hints to banks.
The Reserve Bank frequently announces its policy position and urges the banks to cooperate in implementing its credit policies.
Selecting Credit Controls:- Under selective credit controls, the RBI gives directions to other banks to give or not to give credit for certain purposes to particular sectors. This method can be applied in both a positive and negative manner. In positive manner, it means using measures to channelise credit to priority sectors. The priority sector includes small-scale industry, agriculture, exports, etc. In a negative manner, it means measures to restrict the flow of credit to particular sectors.
Margin Requirements:- Margin is the difference between the amount of the loan and the market value of the security offered by the borrowers against the loan.
If the margin fixed by the Central Bank is 40%, then commercial banks are allowed to give a loan only up to 60% of the value of security.
By changing the margin requirements, the Reserve Bank can alter the amount of loans made against securities by the banks.
- An increase in margin reduces the borrowing capacity and money supply.
- A fall in margin encourages people to borrow more.
- RBI may prescribe different margins for different types of borrowers against the security of the same commodity.
- Margin is necessary because if a bank gives a loan equal to the full value of security, then the bank will suffer a loss in case of a fall in the price of security.