What is meant by Margin requirement?

The difference between the market value of security and the value of the amount lent is called the margin requirement.

Additional Information:-

1st Definition:-

Margin requirements refer to the discount fixed by the central bank on the assets mortgaged as security by the borrowers to the commercial banks.

2nd Definition:-

The 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.

3rd Definition:-

The Margin is the difference between the market value of the security and the value of the amount lent is called the margin requirement.

Example:-

A person mortgages his house worth ₹ 1 crore with the bank for a loan of ₹ 80 lakh.

The margin requirement in this case would be ₹ 20 lakh.

How margin requirement is used to control money supply:

The margin requirement is raised when the supply of money needs to be reduced.

The margin requirement is lowered when the supply of money is to be increased.

Rise in Margin Requirement:-

Fall in demand for credit – Fall in the supply of money by the commercial banks – Fall in money supply – Inflation is controlled.

Fall in Margin Requirement:-

Rise in demand for credit – Rise in the supply of money by the commercial banks – Rise in the money supply – Deflation is controlled.