A fall in margin requirements enhances the borrowing capacity of the public, which raises the money supply in the economy.
Margin Requirements: Margin is the difference between the amount of the loan and the market value of the security offered by the borrower against the loan.
If the margin fixed by the Central Bank is 40%, then commercial banks are allowed to give a loan only up to 60% of the value of security.
By changing the margin requirements, the Reserve Bank can alter the amount of loans made against securities by the banks.
- An increase in margin reduces the borrowing capacity and money supply.
- A fall in margin encourages people to borrow more.
- RBI may prescribe different margins for different types of borrowers against the security of the same commodity.
- Margin is necessary because if a bank gives a loan equal to the full value of security, then the bank will suffer a loss in case of a fall in the price of security.