How does the fixation of a margin, required on secured loans, affect the flow of credit in India?
Margin
requirement refers to the difference between the current value of the security
offered for a loan (called collateral) and the value of the loan granted. For
example:- a person mortgages his house worth one crore rupees with the bank for
a loan of 80 lakh rupees. The margin requirement in this case will be 20 lakh
rupees.
It is a qualitative method of credit control adopted by the central
bank in order to stabilize the economy from inflation or deflation. During inflation, the margin requirement is increased which reduces the credit demand in the market, and thus money supply is reduced correcting inflation whereas, during deflation, the margin requirement is decreased which increases the credit demand in the market, and thus money supply is increased correcting deflation.
Margin requirement refers to the difference between the current value of the security offered for a loan (called collateral) and the value of the loan granted. For example:- a person mortgages his house worth one crore rupees with the bank for a loan of 80 lakh rupees. The margin requirement in this case will be 20 lakh rupees.
It is a qualitative method of credit control adopted by the central bank in order to stabilize the economy from inflation or deflation. During inflation, the margin requirement is increased which reduces the credit demand in the market, and thus money supply is reduced correcting inflation whereas, during deflation, the margin requirement is decreased which increases the credit demand in the market, and thus money supply is increased correcting deflation.
