TIGHTER CREDIT

Sun (Auckland), Volume 1, Issue 40, 10 May 1927, Page 1

TIGHTER CREDIT

Increased Bank Rates Disturbs Business Houses CURB ON TRADE RESENTED All the banks operating in New Zealand yesterday announced a rise from 6J to 7 per cent, in the rate of interest charged on overdrafts. The increased charge may have far-reaching effects, particularly on business firms or individuals who are in straitened circumstances, and the spending power of the community must inevitably be restricted. This morning conferences at which the situation was discussed were held in many Auckland business houses.

The opinion that the banks have taken a harsh and ill-timed step is shared by many city business men, who consider that the profits made by the banks in recent years furnish no evidence to justify their action. “The banks are too damned greedy,” was the outspoken comment of one man, managing director of a concern which operates throughout the Dominion.

On the other hand, the banks affirm that their action will be for the future good of the Dominion that extravagance will be curbed and unnecessary importations limited. The explanations made by banking officials suggest that an altruistic desire to save the Dominion from financial collapse was the only reason for the raised charges. PRESSURE ON BANKS For some time there has been strong inquiry for advances from banks and other lending institutions. The pressure has been so keen that on March 31 of this year advances by the banks exceeded deposits by £5,271,996, compared with £982,662 on the same date in 1926, and there has been a growing disinclination to entertain fresh advances. The obvious remedy might seem to be a straight-out refusal of further accommodation, but it is pointed out that the banks are not justified in declining further funds to good customers. A complete halt in advances would cripple trade and threaten chaos, so the only recourse of the banks was to discourage borrowing by raising the rate of interest. A curious feature is that the increase follows a drop in the discount rate in England. The discount system in England and the overdraft system in New Zealand are not exactly parallel, but in the past the fluctuations of the English discount rate have often influenced overseas financial charges. •Auckland banking authorities are unable to furnish definite figures concerning overdraft rates abroad. In America, where cash trading is encouraged, the rate is higher, if anything, than in New Zealand. In Australia, for some years, the rate charged on overdrafts has been 6J per cent., while 5 per cent, was paid on deposits. New Zealand banks recently moved in the direction of encouraging deposits by increasing the rate on deposits from to 5 per cent. Their latest check on free spending is at the other end of the scale. More will have to be paid for borrowed money.

FURTHER CHECK ON IMPORTS Altered exchange rates, also introduced yesterday, are designed to achieve the same effect. Money paid for imports will be charged 12s 6d, instead of ss, in each £100; while for returns on exports the charge has been conversely reduced.

“To encourage deposits and discourage borrowing during the period of stringency we must raise the overdraft rate and at the same time offer better terms to investors,” said a banking authority this morning. This authority added that the altered exchange rates would stimulate exports and reduce imports. The theory that the banks have taken justifiable action is not unanimously supported by business men. “Instead of stimulating trade,” said one well-known merchant, “they are going to handicap it. The higher overdraft and adverse exchange will stifle business, and the tax on local industries will be severe.” Another man, director in six companies, said: “While the increased overdraft rate is very undesirable on account of the diminishing amount of business now offering, it means that overhead expenses will have to be cut down. Practically every business has an overdraft, large or small, and the overdrafts will have to be reduced. REDUCTION OF OVERHEAD “The cautious merchant will also reduce his overdraft in other directions. An hour after I hear# of the increased rate I called a conference of my departmental heads, and informed them that the burden of stock would have to be reduced to the minimum consistent with efficiency. It keys us all up, and good may come out of it, because imports will be restricted, while I don’t think legitimate enterprise will be affected.” The opinion that the New Zealand banks were too conservative, and could easily have given the extra £ per cent, on deposits without taking it out on overdrafts, was also advanced. A fourth man, spoken to in the office of one of New Zealand’s largest soft-

INTEGRITY DID NOT COUNT “His honesty and integrity have no relation to his morality,” declared His Honour Mr. Justice Stringer to-day when a witness was called to testify to the com--nercia! honesty of a prisoner ield on a charge of indecent -sault.

goods houses, said increased bank rates were never welcome, because they upset financial and trade circles, but in this case the advance would have a healthy effect in checking extravagance and the time-payment mania. TWO VIEWPOINTS TRADERS VOICE SORENESS “NORMAL, CONVENTIONAL PROCESS” (.Special to THE SUN. ) CHRISTCHURCH, Monday. Although the chief attitude encountered in financial, industrial, business and farming circles over the action of the banks in raising the overdraft rates from 6£ per cent, to 7 per cent, is one of resentment or alarm, another opinion encountered in course of an inquiry by a SUN man is that it is a normal and conventional process intended to deal with a certain condition of affairs. “You can describe the feeling we have as not one of mere resentment, but of intense soreness,” said a prominent stock agent. “The banks may claim that their action over overdrafts will check importations, but it certainly is not a very good way of encouraging exports.” MOVE NOT UNEXPECTED Mr. T. G. Russell, an acknowledged financial authority, said the banks were in need of money and were proceeding to obtain it on conventional lines. Their action was not unexpected by those who had watched the returns and had noted the heavy excess of imports over exports during the past two 3 r ears. Banking deposits had diminished for some time, and it was imperative that these should be increased, so a higher rate was being offered. In the Dominion the artificial system of paying wages not based upon production checked trade development and kept the purchasing power of the people at a low ebb. If wages could be increased so that the incidence would fall upon the results, prices would recede, the purchasing power of money would be increased, and one of the principal factors of prosperity encouraged. Then, if the primary ex- j porters were able to make a profit, ' money should soon accumulate and the banks, not having to pay the high ; rates they are now offering, would be ; able to pass on the reduction to their i consumers. “To my mind, the rise in overdrafts is the most serious thing encountered : by the business community for a long : time,” said a large exporter. “It is a revelation of the economic condition of the banks, although the last quarterly i returns by them did riot indicate that the position was so serious. They are out to attract deposits, because they are short of money. “The banks have been making enormous profits by comparison with those of the business community," he went on, “and the least they could have done in these hard times was to have stood their share of the trouble with the rest. “The rise in overdrafts has been forecasted,” said a sharebroker, who expressed the opinion that the Government may have influenced it. The very effect of a rise in the bank rate would restrict share business. “TIMES HARD; MONEY DEARER" “Times are hard, so money is dearer,” said a banker with a non-committal smile. “After ail, the rate of interest on overdrafts is based largely on the opinions of bank managers. If the security offers some risk, he naturally demands an interest to compensate for that.” Interviewed as to the condition of the money market in Christchurch, a member of a legal firm well acquainted with rural conditions said that a considerable amount of money awaited investment on good mortgage securities, but such securities were not at the moment available for the money offering. VAIN HOPES FINANCE MINISTER’S VIEW CORRECTING TRADE BALANCE (Special to THE SUN.) FEILDIXG, To-day. ‘“I was hoping against hope that this would not take place for some time,” said the Hon. W. Downie Stewart, Minister of Finance, to-day, when expressing disappointment that the rise of half per cent in the bank rate on fixed deposits had become necessarv from to-day. “It went up in the last depression in 1921, and I believe the banks have been striving to keep it down till the last minute. “To anyone who has studied the figures of deposits and advances, j however, it is difficult to resist the conclusion that something had to be done to remedy the balance. “ I had hoped that it would have been postponed, because it will intensify the position.” Mr. J. G. Elliott, M.P., ventured the opinion that the farmers and business | people of this district would be hit j hard. "We are not a bit happy about j it,” he said. “The half per cen‘ which | the mercanti’ houses have to nay will be passed or o’the fa*' r>- nd the | question will not be l helped any by it,”