RATE OF INTEREST.

Taranaki Daily News, 17 June 1922, Page 6

RATE OF INTEREST.

WHY: IT REMAINS HIGH. A BANKER’S EXPLANATION. ENGLISH RATE NO CRITERION. Wellington, June 15. The question of the rate of interest on overdrafts was referred to by Mr. George Elliott in his address at the annual meeting of the Bank of New Zealand to-day. In the course of his remarks Mr. Elliott said:— The minimum rate of interest on overdrafts in New Zealand has, for the Izwt fifteen months, been 7 per cent. Owing to the abnormal demand for money by our customers in New Zealand which set in towards the end *of 1920, it became necessary for the bank to sell a number of its British investments which yielded a high rate of interest. In order to provide for the loss of interest due to these transactions, to meet higher rates of interest allowed on fixed deposits, to cover our ever increasing expenses, to check borrowing as much as possible, and to induce customers to realise assets, the rate of interest on overdrafts was raised to 6A per cent. As a matter of fact, just prior to that period, the bank, to meet the necessities of its customers, discounted at the then Bank of England rate of 7 per cent, some millions of pounds of British Treasury Bills, and lent the proceeds on overdraft in New Zealand at 6 per cent. Such a state of affairs could not, of course, continue indefinitely. Owing to the excessive importations which commenced in the middle of 1920, and in view of the unfavorable outlook for some of our chief products, it. soon become apparent that it would be necessary for us to continue realising our gilt-edged investments if we were to stand by our customers to the fullest extent possible. As time went on, the position became more acute, owing to the fall in the value of land, produce, and live stock; increased taxation (which, as far as the banks are concerned, is much higher in New Zealand than in Great Britain) had also to be faced, and it was, therefore, decided to raise the rate on overdrafts to 7 per cent. HIGH PRICES FOR LAND. It is not the 7 per cent, rate that is embarrassing farmers—who axe the chief complainants —it is the ridiculously high price that, in many cases, was paid for land, which not infrequently is mortgaged for more than its actual value. Another cause is that far larger areas were bought than the purchasers’ means warranted. In still other instances, mortgagors, in order to secure a low rate of interest, borrowed on mortgage sums which gave them no margin of funds to meet contingencies, and cannot now obtain further advances from the mortgagees. Realisation of the whole or portion of their land is the solution of the difficulties, and not a mere reduction of their interest charges. It is a fallacy to suppose that reduction of the Bank of England rate necessarily means a reduction in the overdraft rate. here. On the contrary, under certain circumstances, it .should mean an increase. Every bank in the Empire requires to keep a large amount invested in London in immediatelyrealisable securities. As the Bank of England rate falls, so does the interest return on such investments. The position at present is, that our London funds, on which we received from 5f per cent, to 6J per cent, when the overdraft rate here was 6 per cent., now yield us £% per cent. We could, whilst using our reserves in London to substantial advantage, afford to keep overdraft rates here at a low figure, but with the present low yield on our London funds —much lower indeed than the average rates we pay on fixed deposits here —we must not, by making money cheap, handicap ourselves in our efforts to bring down advances to normal figires, and it is this reduction of advances to normal figures that is the paramount necessity of the position today. Our advances in the Dominion are much higher than we care to see them, and are" justified only by the extreme need of so many of our customers, and by our consciousness that in the great majority of cases it is only a matter of reasonable time for the position to right itself. As these advances are reduced, our London reserves will be built up, but they will be built up in investments yielding a much lower return than those we had to realise. Lest there be any question as to the correctness of this statement, I may tell you that, within the last six months, to meet the requirements of our New Zealand business, we realised one million of 5’2 per cent. British Exchequer Bonds due three years hence, and one million of 5 per cent. British National War Loan. At this time of the year, proceeds of produce shipments replenish our funds in London, but new money is now bringing us in only 2A per cent. COMPARISON WITH ENGLAND.? There is evidently some misconception as to the relation between the Bank of England rate and the ruling rate of interest in this country. When we are told that the Bank of England rate is 4 per cent., it means that that institution’s minimum rate of discount is 4 per cent., but the bills which they discount at 4 per cent, are of a class which are never offered here —that is to say, they are for short terms, and usually bear the endo - :ement of a bank or of some financial house of the highest standing, and are thus one of the most liquid forms of investment a banker can deal in. The bills offered to bank in New Zealand are practically confined to those given by retailers to their merchants, and by farmers and dealers to the stock and station agents; these we discount at 6% per cent., but > they are by no means liquid as are those discounted by the Bank of England. Borrowers in England on nonliquid securities (such as we have to accept) ar.o paying rates little, if any, below those current here. In proof of this, we have the fact that debentures of some of the leading English industrial companies are now quoted at prices which yield from to 7 per cent, to the investor. Again, English bankers have, besides the lower taxation, many advantages which we have not; their advances being, as I • have explained, liquid and rei dily convertible into cash, they can safely work on much smaller

cash reserves, and that, the larger volume of business done, with the consequent smaller expense ratio and the comparative immunity from bad debts, enables them to work on a much smaller margin of profit. It is the desire of the banks to reduce the overdraft rate, and the sooner customers reduce their overdrafts to normal figures, the sooner the rate of interest will come down.