Monetary Policy - Qualitative Tools

 Rationing of Credit

• Credit Rationing in this method maximum amount of credit flow to a particular sector is controlled and credit flow is streamlined. There are two ways of rationing.
• Variable Portfolio Ceiling (Priority Sector Lending).
• Capital to Risk Weighted Asset Ratio (CRAR or CAR).

Variable Portfolio Ceiling

• In this method amount of credit that should go to each sector is fixed
• There are certain sectors in economy which require special treatment for the purpose of economic development and social welfare. Hence the ceiling for different sector is fixed
• Example: Priority Sector Lending Norms All Indian banks have to follow the compulsory target of Priority sector lending (PSL) – 40% Money. The priority sector in India are at present the sectors—agriculture, small and medium enterprises (SMEs), software industries, self-help groups (SHGs), agro-processing, small and marginal farmers, artisans, distressed urban poor and indebted non-institutional debtors besides the SCs, STs and other weaker sections of society.
• If target is 40% but bank give only 36% as loan not reach the target. The balance 4% is given to RIF (Rural Infrastructure Fund).
• Capital Adequacy Ratio (CAR) or Capital-Risk Weighted Assets Ratio (CRAR)
• (Mention the sector not give loan to Risk sector -  If give loan (Should compulsory maintain 9% of CAR (Keep Some Capital) – calculated by formula))
• The capital adequacy ratio (CAR) is a measurement of a bank's available capital expressed as a percentage of a bank's risk-weighted credit exposures.
• The capital adequacy ratio, also known as capital-to-risk weighted assets ratio (CRAR), is used to protect depositors and promote the stability and efficiency of financial systems around the world.
• RBI in his monetary policy assigns some risk to loans given to certain sectors on basis of chance of a loan to repaid or not repaid. Loans with risk are given a weight proportional to risk summed up to obtain risk weighted assets value
• RBI mandates that each bank should maintain 9% CAR
• Hence credit going to certain sectors with risk can be controlled through change in CRAR

Margin Requirements Regulation

Fixing Margin Requirements

• The margin refers to the "proportion of the loan amount which is not financed by the bank". Or in other words, it is that part of a loan which a borrower has to raise in order to get finance for her purpose and remaining amount will be provided by bank.
• A change in a margin implies a change in the loan size.
• This method is used to encourage credit supply for the needy sector and discourage it for other non-necessary sectors.
• When high margin is fixed, the off take of loan is low and vice versa
• This can be done by increasing margin for the non-necessary sectors and by reducing it for other needy sectors.
• 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.

Regulation of Consumer Credit

• Consumer Credit refers credit given to consumer for the purchase of Consumer durable goods. They are generally given in the form of EMI or Instalments
• Consumer credit regulation involves two devices: minimum down payment, and maximum period of payment. Both are applied to consumer loans on listed articles.
• Raising the required down payment limit tends to reduce the demand for credit for this purpose, as well as to reduce the amount that can be legally supplied for it.
• Shortening of maximum period of payment, with increased required instalment payments, also tends to reduce the demand for such loans and thereby check consumer credit.
• This method is an extremely useful supplementary tool for controlling inflation and maintaining economic stability. However, this method has great significance in advanced countries, where there is large scale consumer credit through instalment payments and hire purchase.

Fixing Margin Requirements	Regulation of Consumer Credit
Set margin by RBI to the Loan buyer in all Sector. Ex: Housing loan: Need 80 lakh. Margin is 25%. So loan buyer put his   own money of 20 lakhs. Balance given by bank. If Margin Low – more loan. Margin High – Less loan.	Margin for Goods/Service (Car, bike). Ex: EMI Down payment. No of instalment (Month). Adjusting margin of down payment & Instalment. Less down payment & More instalment – More Loan. More down payment & less instalment – Less Loan.

Moral Suasion

(Advisory of RBI to Bank)

• Moral suasion implies persuasion and request made by the central bank to the commercial banks to co-operate with the general monetary policy of the former.
• It implies to pressure exerted by the RBI on the Indian banking system without any strict action for compliance of the rules.
• It is a suggestion to banks.
• Under moral suasion central banks can issue directives, guidelines and suggestions for commercial banks regarding reducing credit supply for speculative purposes
• RBI also releases Do’s and Don'ts or call for meetings Publicity This is yet another method of selective credit control. Through it 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. Through its weekly and monthly bulletins, the information is made public and banks can use it for attaining goals of monetary policy

Directives and Direct Action

(If bank is going to loss stage, RBI take direct action)

Control Through Directives

• Under this method the central bank issue frequent directives to commercial banks.
• These directives guide commercial banks in framing their lending policy.
• Through a directive the central bank can influence credit structures, supply of credit to certain limit for a specific purpose.
• The RBI issues directives to commercial banks for not lending loans to peculative sector such as securities, etc beyond a certain limit.

Direct Action

• Under this method the RBI can impose an action against a bank. If certain banks are not adhering to the RBI's directives,
• RBI may refuse to rediscount their bills and securities.
• RBI may refuse credit supply to those banks whose borrowings are in excess to their capital.
• Central bank can penalize a bank by changing some rates.
• At last it can even put a ban on a particular bank or ban branch expansions if it does not follow its directives and work against the objectives of the monetary policy.

Prompt Corrective Action

• RBI continuous Monitor, banks CAR, NPA (Non performing Assert), Net Returns (Profit of Bank), Leverage ratio (Risky loan ratio) – Anything is low, RBI mark the bank in prompt corrective action and take action to maintain it.

Promotion & Publicity

• RBI transparently publish bank details (Good loans, Bad loans, CRR, SLR etc…) in their website.