Write short notes on:
4. Regulation of Margin Requirements
Answer:
Margin requirement implies ascertaining the value of the loan that can be granted upon the mortgage of a certain security. The banks keep a margin, which is the difference between the market value of a security and its loan value. For example, a commercial bank grants loan of Rs 80,000 against security of Rs 1,00,000. So, the margin is calculated as Rs 1, 00,000 - Rs 80,000 = Rs 20,000. A rise in the margin requirement discourages loans. Accordingly, when the central bank decides to restrict the flow of money, then the margin requirement of loan is raised. This is referred to as 'Regulation of Margin Requirements'.
