Qualitative Measure of the RBI:
- Tools which define the direction of credit in the economy ie where the money will be channelized in the economy as per the requirement of the economy.
- Most of the measures are of advisory nature rather than mandate or compulsion to be followed by the bank.
- The objective is to encourage credit supply for the needy sector and discourage it for other non-necessary sectors.
Fixing
Margin Requirements:
- It is that part of a loan which a borrower has to raise at its own in order to get finance for any purpose.
- This portion of the loan is not financed by the bank.
- A change in a margin implies a change in the loan size.
- Increasing margin for the non-necessary sectors will reduce the allocation of funds by banks to that particular sector .
- Example, If the RBI feels that less credit supply should be allocated to Real Estate sector, then it will increase the margin.
- Reducing margin for the necessary sectors will increase the allocation of funds by banks to that particular sector.
- Example, If the RBI feels that more credit supply should be allocated to agriculture sector, then it will reduce the margin and even 85-90 percent loan can be given.
- Apart from this,margin money ensures motivation of the investor as certain amount of his money is also invested.
Publicity:
- The Central Bank (RBI) publishes various reports stating what is good and what is bad in the system.
- This published information can help commercial banks to direct credit supply in the desired sectors.
Credit Rationing:
- Central Bank fixes credit amount to be granted / rationed by limiting the amount available for sectors in the form of loans by commercial bank.
- It helps in lowering banks credit exposure to unwanted sectors.
- Ex. Rationing of credit during demonetization and Targeted Long term REPO operation (TLTRO)
Moral Suasion / Control Through Directives:
- Directives, Guidelines and Suggestions issued by the RBI to persuade the Indian banking system
- These are in the form of advisory without any strict action for non-compliance of the rules.
Direct Action:
If certain banks are not adhering to the RBI’s directives, the RBI can impose an action against a bank.
FORWARD GUIDANCE:
- Communication from central banks to the public about the state of the economy and likely future course of the monetary policy.
- It influences the financial decisions of households, businesses and investors by providing guidance for the expected path of interest rates.
- Forward guidance attempts to prevent surprises that might disrupt the markets and cause significant fluctuations in asset prices.
