Differences in Gross Interest

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Differences in Gross Interest 
Differences in gross interest may. in audition tu the causes already considered, be due to:- Ii) Differences in Social Esteem. A person with better reputation or integrity can borrow at lower rates. This is partly due to the element of lower personal risk already considered. . -(ii) Differences in Productivity. Where capital can can! greater reward for the producer, he will be willing to pay higher interest. Such trades are. usually more speculative and high1:r il ‘erest can tic attributed to higher risks. Moreover, under perfect competition, as we shall see, marginal productivity of capital, and hence the pu r e rate of interest, tends to equality. Higher rewards in particular employment, if not justified by greater risks or inconvenience. tend to disappear through force competition, But if competition is imperfect, such differences limy persist. Productivity of capital may~if(e·r·in different countries. In new States, for instance, the demand for capital is great, while the supply is very limited. Capital thus has a high marginal productivity, and interest is high. This is due to the immobility of capital over distance as already noted. Partly it is due to greater risk. In the latter case, it is ~ross interest which will be higher, and not net interest. Thus, ultimately differences in interest r-tcs can be reduced to differences in inconvenience or risks of lending except in cases where we are not dealing with the same market. Pure interest tends.to he the same in the same market. To sum UI): “The interest rate charged on individual business is usually determined 11\ personal ne-‘gotlerion between bank and borrower, It reflects such  attributes as the borrower’ ize and general credit standing, his access to alternative credit sources. the size and maturity of the loan. the character of the borrower’s busines , the value to the bank of his deposit account and of other bu iness relationships, and the nature of the . rity, If any, to be pledged. Certain other factor. not related directly to the borrower of the loan but rather to the lending bank or perhaps the banking structure can also be shown to have some effect on interest rates charged for bank business loans. There are the size of the lending bank, the size of the centre in which the bank is located, and the area of the country where the loan was made.”

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Differences in Gross Interest