Which of the following is not a measure of selective credit control ?

Correct — option (2), Sale of government securities.

Central bank controls come in two kinds. NCERT's Class XII textbook Introductory Macroeconomics (chapter 3, Money and Banking, 2026-27 reprint) says quantitative tools control the extent of money supply by changing the CRR, the bank rate or open market operations.

Its qualitative tools aim to make banks discourage or encourage lending, which "is done through moral suasion, margin requirement, etc." Selective credit control belongs to this second, targeted kind.

Selling government securities is an open market operation. NCERT explains that when RBI sells a bond, the quantity of reserves falls, and hence the money supply. That acts on credit across the whole system, not on chosen uses, so it is a quantitative measure.

Lending margins, credit rationing and moral suasion each steer credit toward or away from particular uses, which leaves option (2) as the one that is not selective.

Why the others are wrong

• (1)
  Change in lending margins — NCERT names margin requirement among the qualitative tools. The Banking Regulation Act, 1949, Section 21(2)(b), lets RBI direct banks on "the margins to be maintained in respect of secured advances".

  A higher margin means a smaller loan against the same security, so RBI can tighten credit against chosen goods without acting on the reserves of every bank. That makes it selective.

• (3)
  Credit rationing — Credit rationing limits how much credit goes where, which makes it a selective control.

  RBI's statutory powers work in the same targeted way. Section 21(2) of the Banking Regulation Act lets it direct banks on the purposes for which advances may or may not be made, and on the maximum advances to any one borrower.

• (4)
  Moral suasion — NCERT lists moral suasion first among the qualitative tools: persuasion by the central bank to make commercial banks discourage or encourage lending.

  It carries no fixed legal ratio, but it is aimed at the direction of lending, which places it with selective controls rather than with open market operations.

A central bank can act on the quantity of credit or on its direction. Quantitative tools such as the CRR, the bank rate and open market operations change the reserves and cost of funds for all banks at once.

Selective, or qualitative, tools pick out particular uses of credit. They can reduce what can be borrowed against a commodity, cap loans to a single borrower, or press banks through persuasion.

In India the legal footing for directed lending is Section 21 of the Banking Regulation Act, 1949. RBI may determine the policy on advances, and give directions on purposes, margins, maximum amounts, guarantees and interest rates; Section 21(3) binds every banking company to comply.

Open market operations, NCERT adds, can be outright, which are permanent, or through repo and reverse repo agreements.

Key facts

• NCERT: quantitative tools control the extent of money supply by changing the CRR, the bank rate or open market operations.
• NCERT: qualitative tools make banks discourage or encourage lending, through moral suasion, margin requirement, etc.
• NCERT: when RBI sells a government bond, the quantity of reserves falls, and hence the money supply.
• Banking Regulation Act, 1949, Section 21(2): RBI may direct banks on purposes of advances, margins, maximum amounts, guarantees and interest rates.
• Section 21(3) of the Banking Regulation Act binds every banking company to comply with directions given under that section.

Common traps

• Reading the sale of government securities as a targeted step: it drains reserves across the banking system, which makes it quantitative.
• Taking a lending margin for an interest rate: a margin is the part of a secured asset's value that is not lent against, and RBI can direct it under Section 21(2)(b).
• Leaving moral suasion out because it is not a legal order: NCERT still lists it among the qualitative tools.

UnlockIAS will link similar questions from RAS Pre 2016 here once that paper is published on this site.

• practice — not a real PYQ

  According to NCERT's Introductory Macroeconomics, when the Reserve Bank of India sells government bonds in the open market,

  • (a)the quantity of reserves and the money supply increase
  • (b)the quantity of reserves and hence the money supply fall
  • (c)the Cash Reserve Ratio automatically rises
  • (d)only lending to particular sectors is reduced
  Answer(2) — NCERT says selling a bond leads to a reduction in the quantity of reserves and hence the money supply. Option (1) is the effect of buying bonds; option (3) confuses an open market operation with a change in CRR; option (4) describes a selective control, not an open market sale.
• practice — not a real PYQ

  Under Section 21(2) of the Banking Regulation Act, 1949, the Reserve Bank may give directions to banking companies as to which of the following? A. The purposes for which advances may or may not be made B. The margins to be maintained in respect of secured advances C. The rate of interest on which advances may be made Codes:

  • (a)A and B only
  • (b)B and C only
  • (c)A and C only
  • (d)A, B and C
  Answer(4) — Section 21(2) lists all three: purposes in clause (a), margins in clause (b), and the rate of interest and other terms in clause (e). Options (1), (2) and (3) each leave out one power the section gives.