Catastrophe of bank interest rates – 7

Continued from the previous post –

Now we shall see behavior of different borrowers.

Shop owners – they borrow to start their shop or to expand their shop activities. If they take to start shop then that borrowing comes under capital investment where interest rate is not important as the period for payment is extended. If they borrow for running (working) capital then also rate of interest does not matter so much as the sells cycle continually pays back for that interest. Let us take an example for this.

One cycle of business means one buy of commodities and sells. How many times these cycles repeat decides the recovery of loan and its interest. Generally, commission is around 15 to 30 % on the purchase value. That means if one cycle completes 15 to 30 % earned on the loan. In one year, several cycles are completed and that many times the loan money is recovered and reused and the profit multiplies accordingly. More cycles more profits from that sell of commodity. Different types of commodities will have different number of cycles per year completed and that shows the viability of that product. In food commodities, this repetition is more and loan amount small. In other products, this ratio may be different. The number of cycles decides market condition. More repeats shows that market of that commodity is bullish and so better market and less repeats shows that market of that product is bearish or low. The example of food product we shall take to see how profitability of shops mounts during repeated cycles. Say, 100 rs loan taken; at 15% rate per annum and profit percentage is also 15% of the purchase cost. Suppose 20 repeats have happened in one year. That means 300 rupees earned in one year on 100 rupees loan. In other products, this may vary a little as per the product and marketability. Interest was paid at 15% rate and balance is net profit. In similar cases in all shop businesses, we see interest rate does not matter since if market is good that rate is no problem. At times, we see shoppers take loans at much higher rates from money market to buy goods whose cycle could be good. That means if Banks charge 15% interest on their loans to shops it will be a good proposal. Reducing interest rate is not a benefit to them so shops can be given loans at these rates. Manufacturers know of this repetition from their experience and so in many products where a very large number of cycles (200 to 300 per annum) are generally expected; they give low commission on sell of their products. Products such as biscuits, bread and other daily-consumed eatables come under that. Even so, shoppers do not have to worry, as the cycles are large in numbers.

Continues in next post –

You may contact me on my Email ID given below,

ashokkothare@gmail.com

You are invited to visit my other blogs

Ashok Kothare, http://ashokkotharesblog.blogspot.com/ for stories

I reckon, http://kotharesviews.blogspot.com/ for philosophy

You may visit blog, Ideas and tips on any subject, http://kotharay.blogspot.in/ for intelligent discussions.

Freedom of Expression, http://blogs.siliconindia.com/kothare/ for intelligent discussions

My New Marathi Blog, http://kothare-marathi.blogspot.in/ मला असे वाटते