What is moral suasion?
Moral suasion is a term that describes the use of convincing language. Subtle threats and rhetorical devices to influence or change the behavior of a person or a group of persons. Moral suasion does not involve physical force or compulsion but rather relies on verbal methods to get people to do something. The term is often applied to the actions of central banks in economics.
How does moral suasion work?
Moral suasion is a technique used by the central bank to influence the credit decisions of commercial banks by appealing to their sense of responsibility and patriotism. It means that the central bank requests or advises commercial banks to follow its general monetary policy and act in the best interest of the economy. For example, the central bank may ask commercial banks to limit their lending to the public or to certain sectors that are not considered a priority.
Moral suasion is usually applied along with other quantitative and selective methods of credit control, especially when they are not very effective. The central bank may use this method more frequently when there are many commercial banks in the economy in order to achieve its objectives. The central bank may communicate with commercial banks through letters or meetings and try to persuade them to comply with its directives on money and credit matters.
Moral suasion has a psychological impact as it appeals to the nationalistic spirit of the banks. It is not related to any law or formal method of credit control, and it depends on the personal interaction between the central bank and the commercial banks.
Moral suasion is a lenient method than other selective methods of credit control as it does not involve any penalty or threat of enforcement. It helps the central bank to get the voluntary cooperation of the commercial banks. However, moral suasion can only be effective if the commercial banks respect and follow the directives of the central bank