Moral Suasion

Definition: A moral suasion is an influential approach through which the central bank appeals, advise, pressurize and convince the commercial banks from acting or refraining to act in a certain demeanour. It is often mistaken as a legal action however, it is just a persuasive move whereby general interaction is carried out.

Being a combination of two words, ‘Moral’ means having an apparent understanding of what’s wrong and what’s right; while ‘Suasion’ is convincing someone in any form other than punishment or legal action.

Content: Moral Suasion

Features of Moral Suasion

Moral suasion is a soft method of making the commercial banks adhere to the guidelines framed by the central bank.

Following characteristics better explain what moral suasion is:

  • Monetary Policy Instrument: Moral suasion is aimed at imposing the desired monetary guidelines and policies by ensuring support from the stakeholders.
  • Qualitative Tool: Te purpose of moral suasion is to attain economic growth and price stability in the country for the betterment of the mass population.
  • Controlled by Central Bank: Here, the central bank is the authority that takes charge of convincing the commercial banks on credit and monetary policies.
  • Personal Interaction: Whether through meetings, discussions, speeches, inspections or public statements, moral suasion is all about formal or informal communication.
  • Persuasive Function: It is seen as a way of changing the stakeholders’ viewpoint to acquire their mutual efforts in policy reformation or imposition.
  • Psychological Effect: Moral suasion does not create a legal pressure, instead the central bank tries to get the consent of the stakeholders in the implementation of the policies.
  • Urge for Cooperation: It is of the view that the stakeholders would support the central bank’s guidelines or policies framed in regards to any financial instrument.
  • Not Subject to Lawful Action: Moral suasion doesn’t legally bound stakeholders to follow the policies or guidelines of the central bank.

Implementation of Moral Suasion

How does the central bank practice moral suasion? We have dug out various methods of implementing moral suasion in the real world:

  1. Meetings: The central bank officials meet the stakeholders to exchange views over certain economic policies or guidelines.
  2. Discussions: Another method adopted by the authority is to carry out general discussions with the stakeholders, to understand their perception.
  3. Public Statements or Speech: To create a larger impact, a reputed government official instructs and sway the stakeholders to abide with specific monetary policies
  4. Indication to Banks: By taking certain action over a particular financial body for ignoring central bank guidelines is a clear indication to the other stakeholders involved in similar practices.
  5. Inspection and Visitation: Surprise audits and visits by the authorities or respective officials is a common method of checking for disobedience of guidelines by the commercial banks.
  6. Letters or Guidelines of Threats: When the stakeholders carelessly respond to moral suasion, the central bank steps ahead by issuing letters to threaten the respective economic agents.

Types of Moral Suasion

Moral suasion can be better understood when we can distinguish between its two different types.

Given below are the two forms of moral suasion on the grounds of its implementation:

  1. Pure Moral Suasion: This form of moral suasion is most commonly applied in general practice where the idea is to bring out the selfless behaviour of the individuals to serve a major cause.
  2. Impure Moral Suasion: To ensure economic welfare, impure moral suasion is practised. Here the central bank is the key influencer and commercial banks are the stakeholders who are to be persuaded.

Moral Suasion Benefits

Moral suasion is an effective way of transforming the behaviour of the stakeholders.

We are listing below the various advantages of moral suasion for the central bank, commercial banks and the country on whole:

  • Backup Policy Tool: Moral suasion can be taken as a primary resort to influence the commercial banks’ conduct. Or, as a final step when other monetary policy tools don’t perform as expected.
  • Credit Control: When the central banks need to narrow or block the financial leveraging to a certain industry or sector, moral suasion is practised over the commercial banks who act as lenders.
  • Dealing with Crisis: Whether it is an economic concern or a financial crisis, moral suasion is an effective tool in the hands of the central bank to deal with such temporary adverse situations (demonetization, pandemic, war, inflation).
  • Risk Mitigation: To subside the risk of bad debts, delay or delayed payments, the central bank indirectly takes control over the actions of the stakeholders and other economic agents.
  • Economic Development and Welfare: This phenomenon is applied to stabilize the economic conditions in a country. Moreover, economic growth is another major purpose of this concept.
  • Creates Awareness: Moral suasion spreads awareness among the commercial banks in regards to the code of conduct set by the central bank.

Moral Suasion Limitations

It is not easy for the central banks to smoothly impose policies or guidelines through moral suasion. We can witness this by going through the following list of limitations it has:

  • Ineffective for Large Stakeholders: When there are countless stakeholders, persuasion becomes a tedious task for the central bank.
  • Worthless in Isolation: Simply persuasion won’t work, it needs to be backed with the additional monetary policy instruments to maximize the outcome.
  • Little Moral Responsibility: In many countries, the stakeholders mostly give a damn to their moral responsibilities, which makes it difficult for the authorities to apply moral suasion methods.
  • Inadequate Citizen’s Support and Cooperation: When the people of any country doesn’t have desired faith in their leader or the government, they cannot be moved through moral suasion.
  • Intense Competition in Market: When there is immense competition and the companies need to struggle extremely hard for survival, morality is put at stake for profits.
  • Inapt for Developing Countries: Most of the developing jurisdictions face the issue of non-compliance from the stakeholders as they hardly take moral suasion seriously for economic growth.

Example of Moral Suasion

In the times of Covid-19 pandemic, representatives of the Indonesian Government, OJK (Financial Services Authority) and Bank Indonesia held a meeting with the commercial bank executives. The topic of discussion was lowering the rate of interest levied on the lendings, to provide a life support system to the MSMEs (Micro, Small and Medium Enterprises) in the country.

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