Question

What is meant by margin requirement? How can it be used to control the money supply? Explain it with the help of an example.

Answer 1

Margin requirement refers to the difference between the current value of the security offered for loan (called collateral) and the value of loan granted. It is a qualitative method of credit control adopted by the central bank in order to stabilize the economy from inflation or deflation. In case of inflation, the margin requirement is increased so that demand for loans are decreased and in case of deflation, margin requirements are decreased so that demand for loans are increased. 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.