Continued
from the previous post –
Now
we shall see behavior of different borrowers.
Manufacturers –
this category demands large sum of money to do their manufacturing
activity. Loan money used to buy raw material and to pay for other
expenses. Repeat cycles in this category are not same for all
products and depend largely on the product. Number of cycles could be
small. Profit margin is of the order of 60% to 100%. This large
profit margin covers for the less numbers of repeat cycles. In
consumable goods, repeat cycles could be very good and so at this
rate of profit margin higher rate of interest on loan could be
acceptable to most manufacturers.
If
you study balance sheets of many manufacturers, you will see that out
of total expenditure only about 4 to 7 % is spent on interest on
loans that company has taken. Business management in manufacturer's
category and shoppers is more or less similar and high interest rates
(15%) these borrowers can easily manage. Some loans are for
expansions in business and that being capital investment higher rates
on their loans should be accepted by them. Many companies in India
have developed with this rate of interest and grown to monster sizes.
This observation clearly rules out, any need for reduction in
interest rate to this category. When it comes to profit sharing on
their product since, they have done business from borrowed money,
which belongs to depositors; appropriate share of that profit must go
to them in the form of higher interest rates on deposits. These
depositors are actually silent sleeping partners in their business
and so their right to profit cannot be ruled out. If business does
not work well on whatever account since they are silent sleeping
partners they need not suffer from that loss. Losses most of the time
are due to mismanagement of the business so, depositors cannot be
punished for that. Banks are entitled to recover their dues even from
losing borrower by law. Mr. Rajan ex-governor of RBI had voiced
grievances of depositors but as he showed sympathy Modi government
sacked him. This shows how dangerously the gambler group is working
against depositors. Efficiency of an industry can be judged from its
expenditure on interest on borrowings. An efficient industry does not
spend more than 4 to 7% on bank interest. Any rise in that
expenditure means industry in not functioning at its best.
Squandering of funds, misjudgment on supply and demand consideration
increases this burden. These mismanaged industries often favor lowest
interest rates so that they can continue their mismanaged behavior.
To stop this squandering of funds on concerned and unconcerned topics
we can stop by putting an additional levy if bank interest component
exceeds 7%. This provision may help control such indiscipline.
Industries can be rated as green, yellow and red based on its
efficiency. Green for best management, yellow for medium and red for
bad management should be the rating.
Continues
in next post –
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