Margin:
It is the percentage i.e. contribution by borrower depends on the type of asset, borrower and credit ratings given by the bank. Margin means the own contribution of the owners for purchase of machinery as no bank generally finances 100% of total cost of machinery. The margins change according to the purpose of loans or nature of loan. For instance, for machinery it is 25% and for land it is 40%, which is negotiable. The margin for land is more because land as an asset cannot be easily liquidated. If the bank finance is 100% and the promoter is not contributing anything then there are chances that the borrower may misuse the funds. To avoid that around 30% of the total cost of the project needs to be financed by the borrower and remaining amount is given by the bank. The amount contributed by the borrower is called as ‘owner’s stake’. The bank also checks the sources of the owner’s stake to ensure that owner’s stake is not borrowed money.
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