Margin requirement
Topic: Banking, Credit Creation and Monetary Policy · NCERT: Class 12, Ch 3 "Money and Banking"
Meaning
A margin requirement is the share of a security's value that a bank cannot lend against. The borrower must put up that share from their own money. It is a qualitative tool of monetary policy, meaning it steers credit to or away from particular uses. When RBI raises margins, borrowers get less credit against the same security, which curbs speculative lending (borrowing to bet on price rises) against shares or commodities. Lowering margins eases such lending.
Example
If the margin is 40%, a bank lends only ₹60 against shares worth ₹100. If the margin rises to 50%, the same shares support a loan of only ₹50.
Don't confuse with
- Cash Reserve Ratio (CRR): this is a quantitative tool. It fixes the share of a bank's deposits that must be kept with RBI, so it affects the total volume of credit. The margin requirement affects lending against particular securities only.
Related concepts
- Qualitative tools of monetary policy
- Moral suasion
- Priority sector lending
- Macroprudential policy
- Financial stability