Finance is an important part of Economics.
Elsewhere, I have argued that the finance business is 'interest centric'.
In my post-graduation in management with specialisation in two majors - marketing & finance - we had more emphasis and many papers in economics. It had more coverage than a MA (eco.). We used to think that this was because we had a Director of the Institute who was an economist. The author did not realise the value of economics till he moved into senior positions where decisions ought to be taken.
Each decision involves capital investment, cost, return, demand, supply, etc. Suddenly, there is economics everywhere.
And economic growth is what drives the finance business at the macro level and economic cycles effect or affect the unit's top and bottom lines.
Being interest centric, it is important that any finance company or bank understands constantly where the economic cycle is and what company needs to tweek to optimise the resources and at least, not to get affected badly.
Another important work of an economist would be to forecast the interest rates and the length of the economic cycle so as to help negotiate the right rates and currency of the debt papers to be placed by the company and also correspondingly, subsequently and consequently decide the loan period for lending. Currently, banks and finance companies in competition, without much research and study offer as long as 7 years auto loan at fixed interest rates. If the interest rates are likely to fall in the 7 years contineously, it would be prudent to lend at higher fixed rates. It may be stupid if the interest are likely to increase. This is risky. Are banks and companies hedging? There are I believe some hedging rools available in the finance market. Are they using?
This is very important; it could help double the bottomline of any loan company/ bank.
An economist will also help discover new emerging assets for financing.
There was also a case where a company had lost huge customers and dealer finance business just because of bad attitude and lack of knowledge to understand the interest economics accurately and approprietly. A good understanding of the market, interest and economics by the country head and treasury head would have saved the business and eventually the company.
Economist apart, an MD or country head needs to have a knowledge of the economy and economics to succeed. He or she may have to have economic skill to set the right expectations for an economist and from econmics.
A finance company used to decide the lending rates for car loans in a monthly meeting where author was present. The lending rates used to be about 10% less than the cost of Public Fixed Deposits. When questioned, the marketing ( lending) head would ask to shut up; the promoter would know better was the answer. It might not have been a case of not understanding such a simple arithemetic, if not economics. It was a fraud; company obviously went belly up.
Weighted average cost of funds and marginal cost of funds needs to be appropriatly collated and published to top management so as to reduce more discussion on lending rates. An economist would focus here to minimise constantatly both by innovative products and methods.
He or she can be even a consulting economist, if the company size does not suggest a recruit.
A good practicing economist is something even RBI must think of prescribing to be on Board of Directors of any finance company, including MFI.
