Economics Illitrates

[gaurav200x]

Hi Mpites,
This thread has been opened with one purpose in mind. To help people like me, who are mainly from engineering background and literally, dun know anything about economics.

I, myself, studied economics only till 9th, after which i am reading it now. Since i dun have any foundation, as such, i get confused while reading the articles from ET or Business World.

So, this is what i feel would be the best way to make a helpful thread for all the people who are 'kala akshar bhais barabar' in economics [dun know anything in economics]

I will post the article [full text or maybe just the link] and my doubts alongwith {rest assured, it can be the silliest doubts u can imagine, but i am still grasping the roots} and then benevolent MPites can give some explanation regding it.

I hope.... this way, we can 'Help and get help'


Cheers !!!!

:SugarwareZ-229:

 

[gaurav200x]

Ok, to flag off...

Article link :
http://economictimes.indiatimes.com/articleshow/1879206.cms

My doubts:

1)

The government, critics say, is trying to impose its views on banks in disregard of the interests of minority shareholders. It wants to scuttle the Reserve Bank of India’s efforts to nudge interest rate upwards. The government’s attempts at preventing banks from raising interest rates will damage the banks’ financials.

How will it damage the bank's financial?

Even as the RBI is trying to nudge interest rates up and slow down credit, the ministry wants otherwise. This again is a caricature of the situation.

Why does RBI want to slow down credits?

What we do expect to see is that, over a longish period, there is a secular rise in interest rates amongst banks — and indeed this has happened. The rise should help slow down credit although not as much as the RBI would like. But that is because the demand for credit depends not just on interest rates but also on income.

There are other nuances that should not be overlooked. Sometimes, the central bank changes short-term interest rates in response to conditions in the financial markets. These may not require a response from banks. Rates for certain products are not linked to the PLR. Banks can revise these without revising the PLR.

What is PLR? I dint understand much in the above 2 para. pl explain

Besides, the yield on the loan portfolio can be increased without changing the PLR. For instance, banks may reduce the band for sub-PLR rates (as some have done now), which would translate into an increase in yield. This has the merit of raising interest rates for corporates without imposing a burden on the SME sector for which the lending rate is linked to the PLR

Thus, the presumption that banks must leap to revise their PLRs in response to a signal from the central bank has little basis.

Greek and latin for me.... help! help !

The perception that the government’s directive, if accepted, would have damaged the banks’ financials is also misplaced. As the accompanying table shows, three of the banks in question have increased their net interest margin in the first quarter of this year relative to last year.

They need to make a business decision: do we raise interest rates or do we hold rates and try to grab market share? Their boards certainly have the right to take a view on this question.

The increase in margin is an astonishing achievement in a rising interest rate regime. It could point to deft management of the maturity structure of assets and liabilities. Equally, it could point to pricing power and the absence of adequate competition.

The latter again would justify the government’s wanting to be heard on bank boards — after all, the RBI has used moral suasion when it comes to setting the price band over the PLR.

The whole article, just went above my head. Can someone gimme a detailed explanation?