QUALITATIVE METHODS

In addition to quantitative methods, there are qualitative methods or

selective credit controls at the disposal of central bank. The objective of
such methods is also to reduce the excessive money supply in the country so
that the productive activities could flourish, the speculative activities be
reduced and an optimum credit distribution could be brought in the
economy. The followings are the major selective credit controls.

1. CHANGES IN MARGINAL REQUIREMENTS
While advancing loans the commercial banks ask of mortgages known as
marginal requirements. Such requirement is also set by central bank. By
changing such requirement central bank can infiuence the activities of
commercial banks. As during boom if the marginal requirement is
increased people would borrow less. On the other hand, if such requirement
is reduced people will be able to borrow more. Again, when central bank
,sells govt securities, the buyers have to pay a certain proportion of value of
securities in the form of cash at the time of purchase. While the remaining
amount has to be paid after the stipulated time period. How much cash will
have to be paid by the buyers of securities is determined by central bank.
The central bank can influence the activities of commercial banks by
changing marginal requirements. Again, the importers have to deposit a
certain cash in respect of. opening of Letters of Credit. How much will be
deposited by the importers is also set by central. bank. By changing
marginal requirements central bank can influence the activities of
commercial banks.

2. DIRECT ACTION
If central bank finds that commercial banks do not care for the instructions
of central bank. It means that they are advancing loans for unproductive
purposes, i.e. speculative, hoarding and black marketing is being
encouraged on the part of commercial banks. Again, the commercial banks
may have been found advancing loans in certain fields and regions ignoring
agri sector at the cost of commerce and manufacturing etc. In such
circumstances, central bank can take direct action. It will refuse to re
discount the bills of exchange offered by commercial banks.
But such method is very restrictive and hardly adopted.

RATIONING OF CREDIT
The cornmercial banks have to depend upon central bank while
borrowing. Accordingly, central bank can exercise its powers. If
central bank finds that commercial banks are indulged in
advancing excessive loans it may impose a rationing on credit for
the commercial banks. It means that loans could be made
available to the banks to a specific amount. When commercial
banks face the phenomenon of rationing of credit they will be
careful in advancing loans
to the public.
But this is very strict measure hardly adopted by central bank.
Moreover, the central bank is to serve as a lender of last resort
how it can put a rationing on
credit.

4. CONSUMERS CREDIT CONTROL
It is commonly believed that consumer credits accelerate the
inflation. Therefore, such credit should be controlled.
Accordingly, central bank can issue such instructions to
commercial banks that they should not advance loans for
consumption purposes. In this way, the activities of
consumption lendings will be curtailed and inflation could be
checked. Moreover, the central bank can issue directions to the
business corporations etc. who sell consumer durables to raise
the level of down payments while selling the goods on
instalments.
But this device is least successful in case of developing countries
where the banks neither provide loans to consumers nor the
goods are sold on
instalments.

5. MORAL SUASION
The central bank is the chief of money market. As a result it
advises the commercial banks. If central bank finds that
commercial banks have made excessive lending regarding
speculation and hoarding. As a result, the inflation is generating.
In such situation, central bank can morally persuade the
commercial banks to abstain from such activities. Such like
requests can also be made in respect of nonbank financial
institutions. However, such like instructions and requests can be
effective in case of developed economies. The countries like
Pakistan where the banking system is backward such like
requests are hardly
entertained.

6. PUBLICITY
Each central bank has a research department. Such section
collects the data regarding the economy and its performance.
Thus on the basis of such statistics the activities of commercial
banks are also analysed. If commercial banks were found
advancing loans for unproductive purposes it would be a bad
name for the banks. Therefore, in order to avoid such all the
banks would remain careful in future.