Definition: Moral Suasion refers to a method adopted by the central bank to persuade or convince the commercial banks to advance credit in accordance with the directives of the central bank in the economic interest of the country. Simply, the process in which the central bank requests or persuade the commercial banks to comply with the general monetary policy of the central bank is called a moral suasion.
Moral suasion is applied in addition to the quantitative and other selected methods, especially in the situations where these methods prove to be less effective. The central bank relies heavily on this method where there are a large number of commercial banks, with a view to accomplishing the objectives. Also, the central bank can request or convince the commercial banks to not to advance additional credit to the public or finance the non-priority industrial sectors.
Under this method, the central bank writes letters or hold meetings with the commercial banks with an aim to persuading banks to act according to the directives regarding the money and credit matters of the central bank in the economic interest of the country as a whole.
The moral suasion develops a more psychological effect as the central bank makes an appeal to the bank’s nationalism spirit. Thus we can say that the moral suasion is a psychological phenomenon of controlling the credit in the economy. It is not subject to any law as it is purely informal and involves personal interaction between the central bank and the commercial banks.
The moral suasion is a more lenient method than other forms of selective credit control methods as it does not involve any punitive action or administration threat. Thus, it helps the central bank to gain the willing cooperation of the commercial banks. The moral suasion proves to be effective only when the central bank gets a full cooperation and respect for its directives from the commercial banks.