Qualitative methods of credit control aim at regulating and controlling the allocation of credit among various users rather than influencing the general availability of credit.
We discuss below the main selective credit control instruments:
(i) Margin Requirement: The margin requirement refers to the difference between the current value of the security offered for loan (called collateral) and the value of loan granted. Suppose, a person mortgages his house worth Rs 1 crore with the bank for a loan of Rs 80 lakh. The margin requirement in this case would be Rs 20 lakh. The margin requirement is raised when the supply of credit needs to be curbed. The margin requirement is lowered when the supply of credit is to be increased. Often the margin requirement is kept high for speculative (trading) activities.
(ii) Rationing of Credit: Rationing of credit refers to fixation of credit quotas for different business activities. Rationing of credit is introduced when the flow of credit is to be checked particularly for speculative activities in the economy. The central bank fixes credit quota for different business activities. The commercial banks cannot exceed the quota limits while granting loans.
(iii) Moral Suasion: Sometimes, the central bank makes the member banks agree through persuasion (or pressure) to follow its directives. The member banks generally do not ignore the advice of the central bank. The banks are advised to restrict loans during inflation, and be liberal in lending during deflation.
(iv) Direct Action: Direct action refers to various directives issued by the central bank to commercial bank from time to time to regulate their lending and investment activities. The central banks in all countries pursue direct action against commercial banks. This policy may not be used against all banks, but against erring banks which do not follow the policies of the central bank. These direct actions may take the form of refusal of discounting facilities or refusal of loans from the central bank, charging of penal rate of interest, etc.
