Saturday, April 29, 2017

Catastrophe of bank interest rates – 9

Continued from the previous post –
Farmers come under this category and there problems are of similar nature as manufacturers. Some may suggest that farmers have to encounter nature's vagaries. Therefore, force major conditions apply to their work. This sometimes makes their work more like gambling activity. However, they are not gamblers in the sense "Gambler group" is specified. Major difference in them is that Gambler group never produces anything that is useful to the society whereas farmers produce essential raw material for the development of the society. Farmers are provided with special banking facility NABARD therefore, depositors generally do not come in that business.
Builders – this category comes under category of manufacturer and so similar argument will work to justify high interest rates on loans to them. In this type of business phenomenon of cycles, do not seem to be of much importance however, it does exist. Profit margins are very huge in most housing projects. This is proven by the fact that many builders offer their own loan schemes to attract customers. This loan is nothing but a way of giving the customers facility to pay the price by installments. Any reduction in loan interest to this category is like doing harm to the silent partner, depositors in banks, in this business of money. Most failures in builder business are attributed to mismanagements. Moreover, for their mismanagement, depositors need not suffer.
Contractors – this category comes as manufacturer. Their problems are similar and their work style matches in several ways. They borrow to do work of contract they have taken. Mostly their borrowing is for running the contract until they get pay from the job giver. Their margins are also similar as those of manufacturers and so looking to this rate of interest at 15% on all loans they take cannot be taken as very high, particularly when they charge margins of the order as 20 to 30% or even more. In this business, cycles are experienced similar to shoppers, particularly if it is a small contractor. Most contractors work for government or other public services where they are paid regularly. If we study balance sheets of efficiently operating big contractors, we notice that out of total expenditure interest component costs about 4 to 7%.
Continues in next post –

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