Moral suasion

Moral suasion is a step taken by the central bank for convincing and advising the commercial banks to adhere to the policies and act in the desired manner through general interaction. ‘Moral’ means defining one’s code of conduct based on a clear distinction between right and wrong. ‘Suasion’ refers to the process of advising, convincing or influencing others without forcing or punishing them.

Now let us understand the concept of ‘Moral Suasion‘ with the help of an example;

After demonetization in India on Nov 8, 2017, the governor advised the banks to be lenient with the farmers at the time currency exchange and ensure even flow of money in rural areas.

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.

Involves Personal Interaction: It consists of a lot of jawboning through informal and formal interactions like holding meetings, releasing public statements, making inspections and visits and issuing letters or guidelines.

Psychological Impact: It aims at influencing the stakeholders such that they are self-driven to cooperate with the monetary authorities in the successful implementation of the policies.

Benefits of Moral Suasion

Moral suasion is practised vastly by the central bank to ascertain the economic well-being of a country. To know more about its various other advantages, read below:

Credit Control: Moral suasion is a tactic followed by the central banks of different countries to convince and restrict commercial banks from providing credit to a particular sector.

Helps in Risk Mitigation: The monetary authorities use moral suasion to keep control over the payment and settlement system of the economic agents and stakeholders to mitigate the risk of non-payments and bad-debts.

Acts as a Back-up Policy Tool: It acts as a backup plan when the other monetary policy instruments fail to give the desired results solely, moral persuasion is used to implement the policy instruments effectively.

The motive of moral suasion is to ensure stability, welfare and growth of a country’s economy.

Efficient during Financial Crisis or Emergency Situations: It is the most efficient economic tool for the central banks at the time of short-term crisis like inflation, recession, war, demonetization, etc. to maintain financial stability.