Selective (Qualitative) Methods of Credit Control

While quantitative methods change the total amount of credit, selective or qualitative methods control the use and direction of credit — encouraging it to flow toward desirable, productive purposes and discouraging it from flowing toward undesirable ones such as speculation or hoarding of essential goods.

The main selective methods are:

1. Margin requirements. The margin is the difference between the market value of the security offered and the loan granted against it. If a borrower pledges goods worth ₹1,00,000 and the bank lends ₹70,000, the margin is ₹30,000 (30%). By raising the margin on loans against a particular commodity (say, foodgrains), the RBI makes it harder to borrow against that commodity, discouraging speculation and hoarding; by lowering the margin, it encourages credit for that purpose. This is the most widely used selective tool.
2. Regulation of consumer credit. The RBI can control credit for buying consumer durables (like vehicles or appliances) by fixing the minimum down-payment and the maximum number of instalments. Requiring a larger down-payment or fewer instalments restricts consumer credit; relaxing these terms expands it.
3. Rationing of credit. The RBI can fix limits on the amount of credit banks may extend to particular sectors, or fix a ceiling on the total credit for certain purposes, so that scarce credit is shared out toward priority uses (such as agriculture, small industry, and exports).
4. Direct action. The RBI can take direct measures against a bank that does not follow its credit policy — for example, refusing to rediscount its bills, charging it a penal rate of interest, or declining further accommodation until it falls in line.
5. Moral suasion. This is a method of persuasion rather than compulsion. Through letters, meetings, and appeals, the RBI advises and requests banks to follow its credit policy in the national interest. Its success depends on the banks' voluntary co-operation. …