Banking Awareness Notes on Moral Suasion🕹

Moral suasion refers to an appeal to morality to change or influence behaviour. Moral suasion under economics is defined as the attempt to coerce private economic activity through government exhortation in ways not already defined or dictated by existing statute law.

The Reserve Bank of India (RBI) uses moral suasion as a qualitative instrument of monetary policy, unlike statutory liquidity ratio or cash reserve ratio.

Moral Suasion is a request by the RBI to the commercial banks to take specific measures as per the economy’s trends. For instance, RBI may direct banks not to give out certain loans. It includes psychological means and informal means of selective credit control.

The ‘moral’ element comes from the pressure for ‘moral responsibility’ to function in a way that aligns with furthering the good of the economy. Moral suasion in a narrow sense may sometimes be known as jawboning.

🥏There are two types of moral suasion:

➖“Pure” moral suasion refers to an appeal for altruistic behavior and is not used often in economic policy.

➖“Impure” moral suasion is often referred to as “moral suasion” in economics. It is supported by explicit or implicit threats by authorities to provide incentives to adhere to the authorities’ commands.

💎Features of Moral Suasion

Moral suasion has gained significance in developed countries as an efficient monetary policy instrument. To better understand this concept, let us figure out its critical elements:

➖Qualitative Tool: It is a qualitative tool used for price stability and growth of an economy through credit control.

➖Act of Persuasion: It is all about changing the mind and influencing the stakeholders such that they cooperate to the policy instruments by themselves, without any use of force or pressure.

➖Directed by Central Bank: For economic welfare and interest, the central bank directs and persuades the commercial banks to adhere to the monetary and credit policy instruments.

➖Monetary Policy Instrument: The principal intention of moral suasion is to gain cooperation from the stakeholders to adhere to specific policies and guidelines.

➖Seeks Cooperation: It is not related to enforcing the stakeholders to follow the decisions. Instead, it is an act of convincing them to cooperate and adhere to the policy instruments willingly.