LONG-DATED LOANS.

Auckland Star, Volume LVII, Issue 143, 18 June 1926, Page 12

LONG-DATED LOANS.

AND GOVERNMENT ADVANCES.

NEW BANKING CAPITAL,

FOR ADVANCES ON MORTGAGE. (By Telegraph.—Special to "Star.") WELLINGTON, this day. "The question of creating a special department of the bank for the purpose of making loans on the amortisation principle has, during the past few months, had the careful consideration I of the directors," said Sir George Elliot, chairman of directors at the annual . meeting of shareholders of tbe Bank of New Zealand. "We were induced to pay serious attention to this ■ question i because it is becoming increasingly evident that the idea of loans that allow principal and interest to be paid off by half-yearly instalments extending over a great number of years, has become popular amongst borrowers both rere and | elsewhere. Such loans are peculiarly suited to the needs of primary producers as well as other classes of the community. At present this class of business is undertaken mainly by the Government Advances to Settlers Department, which is the largest single money-lend-ing organisation in the country On 31st March last its existing loans amounted to £30,000,000 made to over 60.000 borrowers. There appear to be many reasons why the activities of this department should not be much further extended. Apart from the political aspect and from the fact that little revenue by way of taxation is obtainable from the department as at present constituted, it seems that loans for its extension are not received with much favour in London, while extensive borrowing in New Zealand would have a tightening effect on the local money market, with a consequent tendency to increase interest rates. In considering the question as to the advisableness, or otherwise, of the bank taking up this class of business, there are naturally important points to be considered. Perhaps the mast important is that it would be improper for a commercial bank to lock up any portion of its deposits, or even its ordinary capital, in loans extending over long periods. As banks have the machinery in existence that would enable them to conduct a . lending business of this description more j cheaply than any other organisation in the Dominion, we have decided, subject |to Parliamentary authority being j granted, to set up a- department for the | purpose of making long-dated loans on an amortisation basis.

New Capital and Debentures. "Authority will be sought to enable the bank to raise f 1,400,250 of new capital to be styled 'long term mortgage capital,* and also to raise by debenture issues as and when required, three times the amount of " this special capital. The debentures would be secured on the 'long term' loans. The amount of loans outstanding would be limited to the amount of the new paidup capital aud debentures issued, *and no deposits nor any of the present capital of the bank would be employed in this new line of business, except by way of a limited ad\-ance pending the issue of the new capital and debentures. The amount of 'long term mortgage' capital proposed to be raised is one-quarter of the amount of the present capital, so that when all the new capital is raised it will represent one new share for every four existing shares. It may be some years before it becomes necessary to raise the whole of the capital, though, as J have said, mortgages for long terms on the amortisation system are prowing in favour throughout the Dominion. Under this echeme it is proposed that loans should lie granted by the bank for periods of not more than 36. years. The Government 1 w'll, of course, have the right to take up one-third of the new issue of capital, and the ordinary shareholders the other i two-thirds. I Rate ot Interest. "The dividend on the new capital will be fixed at 7* per cent per annum. The rate of interest to be charged by the bank on the 'long term' loans will be 6 per cent, and is not to be varied except under authority of an Order-in-Council. Charging this rate of interest, lit is evident we shall not net a return of G per cent from the operations of the long term loan department, as working expenses, losses and income tax have to be provided for: but we shall ask Government, in consideration of our fixing the lending rate on these long term loans at 6 per cent, that the income from this department shall be assessed for taxation on a basis appropriate to the circumstances of the case. Not Limited to Agriculture.

"We may reasonably hope to secure for the ord'nary business of our lw.nk some collateral advantages from these long term loans; but, whether we do so ot not, the profit-earning power of the bank as a whole will be sufficient ,to •pay dividends on the existing capital at present rates, as well as 7 J per cent on the new capital. While this new <fo»nW"nre is intended primarily for the benefit of the pastoral and agricultural st- ..on, : t is also intended to serve other classes of the community. So far as short term credit, and what is known as intermediate credit are concerned, we believe that adequate provision already exists in the activities of the banks, the various farmers' co-operative societies and other lending organisations. While the present opportunity is taken to acquaint shareholders with what we have in view, they must bear in mind that this matter lias not yet been submitted to Parliament. Power will be taken in the bill to enable the Minister of Finance to increase by Order-in-Council the cap'tal of the loan department and debenture issues in the same proportion as already outlined if and when circumstances warrant. Power will also be taken to ennWe the bank to pay off at par the whole or any part of this special new capital should the scheme not be as successful as we hope and expect it to hi. In entering into this new activity, we believe and trust that we are serving the very best interests of .the country. In regard to the rate of interest we propose to charse on these lonns. I may point out that the Rural Ban> Department of the Government Savings Bank of New South Wales charges 61 per cent on long term loans and is not subject to any taxation whatever."'