DEAR MONEY.

Auckland Star, Volume LVIII, Issue 108, 10 May 1927, Page 9

DEAR MONEY.

I PER CENT INCREASE.

DEPOSITS AND OVERDRAFTS.

EFFECT ON BUSINESS

Aβ from yesterday, the banks doing business in New Zealand have raised their rates of interest on deposits by % per cent.

This information standing by itself would be'welcomed in commercial circles, but it has been promptly followed by the additional announcement that the interest on overdrafts is also to be raised by a similar amount. There are more borrower* than lenders, and it is the overdraft rate which has immediately become a burning topic amongst business people. Formerly it was 6V6 per cent; now it is 7 per cent. The previous rate had ruled since January 1, 1923.

The change will not be welcomed. Probably 90 per cent of our business firms work on an overdraft. They are glad to get it and rely upon this accommodation to carry on. But even bank money can be too dear and with competition as keen as it is now the rise will in some cases have a marked effect on the result of a year's trading. The banks' customers have no redress. no means of effectively registering a protest. If they cease to borrow, down go their stocks and they have nothing to sell. Obviously they will still, as in the past, borrow up to the banks' litnite and endeavour to pass the increased charges on to their customers.

Forced Economy. But if their existing stocks are at all above normal—if they have been overimporting—they will be more likely to watch this condition more closelv ' TLe same remark will apply to projected expenditure m business development If they can postpone an intended enterprise o^ii Ber -£ US of business of thTi t T - hIS dlcateß th at one result tL a- i 1 a^ bltrai T action may be in £V f ™ forcin ß that National economy which politician, and others have been preaching for some time.

Deposits and Advances. that SfTft - In ° ther ™ rd8 ' i 4 tnat out of then- own resources the banks fi l? and a^uart «r millions to lend to the public. Going back only a few years, it will be found that at the end of each first quarter of the year the banks held in 1920 over £6,000,000 more in deposits than they had lent out in the form of overdrafts, and in 1924, that difference £*©Owe 18 * dCbt t0 the PnbUc reached

But of late years there has been a diversion into channels other than the banks of money placed with them on deposit and with which they were able to make advances, or overdrafts, and so irrigate and develop the industry and commerce of the country. The deposits with the banks as at 31st March, 1925. were nearly £50,000 - 000; at the same date 1926, they were £47,000,000; at March last £45,528,000. Why Raise the Overdraft? To attract deposits, therefore, the banks have raised the rate of interest payable, and it is being accepted as a necessary corollary that the overdraft rate should be similarly increased. But does this follow? A prominent financial expert in the city challenged the position quite definitely. He claimed that the banks' profits in recent years have been quite sufficient to ctandthe extra burden imposed by the higher payment of interest, certainly for some time "to come, without makiug any extra charge on the community. "In this time of stress," he pointed out, "the bank is enforcing the change and standing no part of the loss. , "If the banks, on the other hand, are adopting the role of economic physicians adminstering to us a medicine for our general good, then they should have given the dose a year ago. To do it now is like locking the stable door after the horse has escaped. They have allowed their customers to make these excessive importations, and now they have put on the screw. It certainly seems to me to be inopportune." The General Effects. Apart from the banks' own customers, it may be accepted as a fact that their action in raising overdraft rates will have an exceedingly far-reaching effect. All those mercantile institutions which lean heavily on the banks and then, themselves, lend in turn, will be forced to revise their rates, and generally speaking money will be dearer. This, however, will not apply to the same extent to mortgages and longterm investments, the rates for which are affected by the scale of the Advances to Settlers' Department end the Public Trust Office, which work on a fixed rate that has not been altered for some time. The following are the new deposit rates that operate as from Monday:—For fixed periods between 3 and 6 months. 3% per cent; 6 and 12 months, 4 per cent; 12 and 24 months, 4*~ per cent; 24 months, 5 per cent.