LONG-TERM LOANS

Press, Volume LXII, Issue 18722, 19 June 1926, Page 12

LONG-TERM LOANS

NEW STEP BY BANK OF N.Z.

DETAILS OF THE SCHEME.

(WEBB ASSOCIATES TELBOEAM.)

In his address at the annual meeting of the Bank of New Zealand yesterday tho chairman, Sir George Elliot, announced and explained a decision by tho Directors to create a special department of tho Bank for tho purpose of making loans on tho amortisation principle. "We wore induced to pay serious attention to this question," the chairman said, "because it is becoming increasingly evident that tho idea of loans that allow principal and interest to bo paid off by half-yearly instalments extending over a great number of years, has become popular amongst borrowers both hero and elsewhere. Such loans aro peculiarly suited to the needs of primary producers as well as other classes of tho community. "At present this class of business is undertaken mainly by the. Government Advances to Settlers Department, which is tho largest single moneylending organisation in tho country. On March 31st last its existing loans amounted to £30,000,000 made to over 60,000 borrowers. "There appear to bo many reasons why the activities of this Department should not bo much further extended. Apart from tho political aspect and from tho fact that littlo revenue by wav 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. Points to he Considered. "In considering tho question as to tho advisabieness, or otherwise, of the Bank taking up thiß class of business, there are naturally important points to be considered. Perhaps the most important is that it would bo improper for a commercial Bank to look 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 cheaply than any other organisation in the Dominion, we have decided, subject to Parliamentary authority, being granted, to set up a department for the purpose of making long-dated loans on an amortisation basis. , , "Authority will bo sought to enable the Bank to raise £1,406,250 of now capital to be styled 'Long Term Mortgage Capital,' and also to raise by debenture issues as aud when required, three times the amount of this special capital. The debentures would be secured on the 'long term' loans. The amount of loana outstanding would be limited to the amount of the now paidup capital and 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 advance pending the issue of the new capital and debentures. Growing in Favour. "The amount of 'long term morU gage' oapital proposed to be raised is one-quarter of the amount of the present capital, so that when all the new j capital is raised it will represent one new share ior every four existing shares. It may be some years before it .becomes necessary to raise the whole I of the capital, though, as 1 have said. j mortgages for long terms on the amortisation system are growing in favour throughout the Dominion. "Under this scheme it is proposed that loans should be granted by the Bank for periods of not more than 364 years. "The Government will, of course, have the right* to take up one-third * of the new issue of capital, and the ordinary shareholders the other twothirds. "The dividend on the new capital will be fixed at 7J per cent, per annum. "The rate of interest to be charged by the Bank on the 'long term* loans I will be 6 per cent., and it >s not to I be varied except under authority of an Order-in.Council. "Charging this rate of interest, it is evident we shall not nett a return of 6 per cent, from the operations of the Long Term Loan Department, as working expenses, losses, and incometax 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 tho income from this Department shall he assessed for taxation on a basis appropriate to the circumstances of the case. Collateral Advantages. "We may reasonably hope to secure for the ordinary business of our Bank some collateral advantages from these long term loans; but, whether we do so or not, the profit-earning power of the Bank as a whole will be sufficient to pay dividends on tho existing capi-, tal at present rates, as woll as 7 J per cent, on the now oapital. "While this new departure is intended primarily for the benefit of the pastoral and agricultural section, it is also intended to serve other classes of the community. "So far as short term credit, and what is known as intermediate credit I aro 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 aharenolderß with what we have in view, they must bear in mind that this matter has not yet been submitted to Parliament. "Power will be taken in the Bill to enable the Minister for Finance to increase by Order-in-Council the capital 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 enable the Bank to pay off at par the. whole or any part or this special new capital should the echeme not be as successful as we hope and expect it to be. , "In entering into this new activity, wo believe and trust that we are serving the very be6t interests of the country. , , ... , "In regard to the rate of interest we propose to charge on these loans, I 'may point out that the Rural Bank Department of the Government Savings Bank of New South Waleß charges 6i per cent, on long term loans, and it is not subject to any taxation whatever." No Dissent, It was thought that tho proposals might evoke considerable discussion,but contrary to anticipation they met with no dissent, and wero unanimously adopted with scarcely any debate. Mr W. Watson said, "Your elected representatives on the Board of Directors, Mr Gibb and myself, have gone carefully into the question, and we are of the opinion that such a new departure, carefully conducted, Will be in the distinct interest of shareholders of the bank and tho people of tho Dominion generally." It was tho duty of on institution like tho bank, Tie said, to recognise that tho country's prosperity depended lnrgely on tho farmers, ins return from long term investments would be much less than tho return from other departments, but thev were inaugurating a policy which, if 'followed by big insurance companies, would