55. The Development of Forms of Credit and their Role in Modern Economy. Развитие форм кредита и их роль в современной экономике России.

The structure of the loan includes the borrower, lender and loan value. Thus, the forms of credit vary depending on the nature of:

1. loan value. There are: commodity, monetary and mixed (goods and money) forms of credit. Commodity form of the loan precedes the monetary one. The first creditors were the owners of the credit surplus commodities (such as grains and other agricultural products). In current practice, this form of credit is not fundamental. Monetary form of credit prevails in today's economy. This is due to the fact that the money is universal value equivalent. Mixed form of the loan is used usually in the economies of developing countries for cash loans that are repaid by periodic supply of their products (e.g. raw materials and agricultural products).

In Russia monetary form of credit is the most popular.

2. the lender and the borrower. Depending on the lender and the borrower there are banking, economic (commercial), sovereign, international and civil (private, personal) forms of credit. Banking form is the most popular in Russia and it has the longest maturity, while commercial form (represented by letter of credits, etc.) is used for short term loans. Sovereign form of credit implies that the creditor is a government. International form is when there is foreign subject. International form is also popular in Russia, however, on the international loan markets is a debtor rather than creditor.

3. The purpose of the loan. There are production and consumption forms. In the first case money is borrowed in order to invest in the production. In the second case, money is borrowed in order to satisfy the consumption need of the debtor (e.g. mortgage, auto, leasing). Since the banking system of Russia focuses on corporate clients, the production form of credit is more popular. However, with the ongoing development of product line, consumption form would be used more often (now mortgage is only 4% of GDP compared to more than 50% in other countries).

NB! Conditions (maturity, guarantees, limits), discounts and interest rates are also important factors!

56. Economic Foundations of Forming the Level of Loan Interest and its Role in the Market Economy.Экономические основы формирования уровня ссудного процента и его роль в рыночной экономике.

An interest rate is the cost of borrowing money and at the same time – the compensation for the service and risk of lending money. Without it, people would not be willing to lend or even save their cash, both of which require a deferment of the opportunity to give up spending in the present.

The lender of money is taking a risk that the borrower may not payback the loan. Thus, interest provides a certain compensation for bearing risk. Coupled with the risk of default is the risk of inflation. When you lend money now, the prices of goods and services may go up by the time you are paid back your money, whose original purchasing power would have decreased. Thus, interest protects against future rises in inflation.

The borrowers pay interest because they must pay a price for gaining the ability to spend now as opposed to having to wait years and years to save up enough money. For example, buying house with mortgage now. Businesses also borrow for future profit - buy equipment now to begin earning those revenues today. Banks also borrow in order to increase their activities, whether lending or investing, and pay interest to clients for this service. 

How Interest Rates are Determined

• Supply and Demand. An increase in the demand for credit will raise interest rates, while a decrease in the demand for credit will decrease them. Conversely, an increase in the supply of credit will reduce interest rates while a decrease in the supply of credit will increase them. The supply of credit is increased by an increase in the amount of money made available to borrowers.

• Inflation. The higher the rate of inflation, the more interest rates are likely to rise. This occurs because lenders will demand higher interest rates as compensation for the decrease in the purchasing power of the money they will be repaid in the future.

• Government. The government affects interest rates via monetary policy and its interbank lending (interbank short term loans). In US the Fed influences interest rates by the use of "open market transactions" - the buying/selling of previously issued U.S. securities. When the government buys more securities, banks are injected with more money than they can use for lending, and the interest rates then decrease. When the government sells securities, money from the banks is drained for the transaction, rendering less funds at the banks' disposal for lending, forcing a rise in interest rates.

The interest rate on each different type of loan, however, depends on the credit risk, time, tax considerations and convertibility of the particular loan.

Risk refers to the likelihood of the loan being repaid. The bigger the chance of the loan not being repaid will lead to higher interest rate levels. If, however, the loan is "secured", meaning there is some sort of collateral (i.e. such as a car or a house), the rate of interest will probably be lower. Sovereign debt securities are also very secure because the borrower is the government -> relatively low interest rates.

Time is also a factor of risk. Long-term loans have a greater chance of not being repaid because there is more time for adversity that leads to default. Also, the face value of a long-term loan, compared to that of a short-term loan, is more vulnerable to the effects of inflation. Therefore, the longer maturity, the higher interest rate.