THE GREAT INTEREST RATE SLIDE
March 7, 2009 by Muhammad Haidar
Filed under Investing, Loans, Muhammad Haidar, Other - Business & Finance, Personal Finance, Politics
Falling! Falling! Falling! Interest Rates! They are a falling. And how?! From the United States to India and in Britain, in between, interest rates have been sliding as never before in history.
The rationale for the frequent cuts in the interest rates is, among other things, to make credit more affordable to individuals and corporations, with the expectation of increase in the offtake of credit, and also to create a set of new borrowers!
Central Bankers around the world seem to think that reducing interest rates would do the trick of increasing public lending. Rather simplistic, one might argue. Because, public lending operations are carried out by Commercial Banks that are obliged to adhere to certain norms in their lending operations. Non adherence to these norms can not only jeopardise the loan asset, but also get them into trouble with the Regulators, the Central Banks themselves. That apart, they (commercial banks) would be doing a disservice to their depositor customers by violating sound lending norms. In fact, the current banking crisis in the West is, in large measure, a result of non-compliance of sound banking principles and the lending norms.
What does a Commercial Banker look for in a potential borrower? Among other things, the borrower’s eligibility for the loan requested by him, and his capacity to repay the loan, alongwith interest in the stipulated time.
Reducing interest rates might increase the demand for loans, but a lending decision hinges on the borrower’s financial health. To the extent that reduction in interest rates contributes to the increase in the number of eligible borrowers (those that qualify for a loan, and have the capacity to repay the same), interest rate reduction would have served its purpose. But is that really the case? A simple increase in the number of people lining up before the Banks for a loan is not sufficient indication of the success of the interest rate reduction formula.
The key to increasing lending, not only to corporate borrowers but also to the retail segment, is the increase in the demand for loans from quality borrowers, and not just an increase in the supply of money available for lending. That is the crux of the matter. Whereas Central Banks may have control over the levers that enable them to increase the money supply, and thereby the demand for loans, they do not have control over the supply of quality borrowers. That depends on the overall economic situation, especially the job situation.
The current job scene as it is now, with layoffs, freeze on new hiring, business failures across sectors, etc., becoming a daily occurance, the number of quality borrowers, would, in fact, tend to come down. How then would you expect the commercial banks to lend more? And to who? Must the banks lend to second and third rate borrowers and risk the health of the institution, apart from earning the wrath of the regulators? That is the million dollar question. It also underlines the limitations of the Central Banks in living up to the expectations of the political establishment, as well as the general public.
The coming months may see a war of sorts between the Central Banks and the Commercial Banks, each blaming the other for not doing enough to alleviate the pains of the current economic crisis. The truth of the matter is that this crisis is a result of faulty policies pursued over a long period of time, and can neither be wished away, nor easily resolved.
It may be some time before the crisis plays out its course, and normalcy is restored. How long a time would that be? Does anyone know?
Views expressed above are personal.
How To Get A Bank Loan
When someone is looking for a bank loan, it means that there is something that they want to buy but are not able to buy it right then. This can be something that is tough for you to figure out, and it might be something that you need. One of the ways that people get things that they cant currently afford to pay for is to get a bank loan to cover the costs. Then they go from there. This is a great way to make sure that they can get things that they want to get, and usually it is easy to get a bank loan. You simply have to follow the process.
The first thing that you have to do to get a bank loan is to apply for one. This is a process that is going to require a lot of information on your part. First of all, you have to know what kind of loan you are looking at, and how much money you are going to need. Next you have to be sure that you are going to be able to pay back the loan, so you have to know how much you want to make payments for. Also, you have to be able to tell the bank what you need the money for, how much money you need, and how you are going to pay them back.
The process of getting a bank loan can take a lot of time, and it can be very frustrating, but it is the best way to do it. If you get loans from other places, you might run into trouble with raised interest rates, extra fees, or even with money being demanded from you that you should not have to pay. Banks are reputable organizations that can afford to loan you money and that will always follow the rules of commerce. If you go with a bank loan, there are going to be rules and regulations that you will know about ahead of time and that cannot be broken. A bank loan is really the best way for you to make sure that you are getting the money that you need, and that you are finding ways to be as productive as you can be.
There are many benefits to getting a bank loan. First of all, you are going to be able to have the money that you need to get what you want. Also, you are going to have low monthly payments that you can make. And each bank loan that you get and are able to pay off is going to put good marks on your credit score and give you a chance to look even better the next time you apply for a bank loan. Bank loans are perfect for emergencies or when starting a new business. The list of positive reasons for getting a bank loan goes on and on for miles. Quite simply, there are many good reasons to get a bank loan.