Selective or Qualitative Credit Control Measures of RBI: Under the selective or qualitative credit control methods, the RBI encourages flow of credit only to certain types of industries and discourages the use of bank credit for certain other purposes.
Under this method, extension of credit to essential purposes is encouraged and to non-essential purposes is discouraged. Hence these methods not only prevent the flow of credit into undesirable channels but also direct the flow of credit to useful channels.
The Banking Regulation Act, 1949 has given extensive power to the RBI to apply selective credit control. The following are the different methods of selective credit control methods adopted by the RBI.
1. Directiveness: Since 1956, the RBI has issued many directions to the banks. Of them, few examples are quoted below.
1. The RBI issued its first directive on 17 May 1956 with a view to restrict advances against paddy and rice. Later it was extended to food grain, pulses, oil seeds, vegetable and sugar etc.
2. The RBI fixed higher minimum lending rates for loans given subject to selective credit controls.
2. Moral Suasion: Moral suasion aims at strengthening natural confidence and understanding between the monetary authority and the banks as well as financial institutions. It is not a statutory obligation. It is only a persuasion of commercial banks not to apply for further accommodation from RBI.
RBI has been sending letters periodically to the commercial banks requesting them to cooperate with it for controlling credit. The RBI held regular meetings and discussions with commercial banks to highlight the need for mutual cooperation cooperation to implement the monetary policy effectively. Here there is no element of compulsion. So the effectiveness of this method depends on the willing cooperation extended by the commercial banks.
