Qualitative tools of credit control – Regulation of margin requirement

Margin is the difference between the market value and the loan value of securities offered by borrowers against secured loans.

By prescribing the margin requirement the central bank the amount commercial banks can advance as loans to their borrowers.

ie the commercial banks can offer only a part of the market value as loan.

Eg if the margin requirement is 20% the borrower has to pay 20% from his own resources and the commercial bank contributes 80%.

If value of security offered is Rs 1000/-

the borrower has to put in Rs 200/- and

the bank will give a loan of Rs 800/-.

Higher/lower the margin requirement lower/higher will be the loan offered by commercial bank. This can discourage/encourage demand for loans.

Margin against a particular security is increased/decreased in order to discourage/encourage the flow of credit to a particular sector.

This is very effective to control speculative activities. An increase in margin requirement will reduce speculation as the borrower has to contribute a greater amount of his own resources to speculate.

Similarly a decrease in margin requirement will increase speculation.

Posted in General Economics