The Press UESDAY, SEPTEMBER 12, 1961. Charge For Overdraft Authorities

Press, Volume C, Issue 29616, 12 September 1961, Page 12

The Press UESDAY, SEPTEMBER 12, 1961. Charge For Overdraft Authorities

The decision of New Zealand trading banks to charge a fee for overdraft authorities whether exercised or not, as distinct from interest charges on actual overdrafts, should serve several useful purposes. In the first place, no doubt, it is intended to help banks meet the high interest charges they have to pay the Reserve Bank for credit to meet customers’ demands, often arising from the sudden exercise of a dormant authority. Because of the credit squeeze, borrowing from the Reserve Bank has become quite a burden for some banks. By putting a moderate charge on overdraft authorities the banks have been able to avoid seeking permission to raise interest rates on overdrafts to nearer the 7 per cent they pay the Reserve Bank and thus adding to general costs of production and distribution. The payment for authority to overdraw has become standard banking practice overseas; and the New Zealand Government, in fact, has been paying a relatively heavy “ commitment ’’ charge of I per cent, to the Midland

Bank for its unexercised overdraft authority of £lO million there. The change should benefit the New Zealand economy as well as the banks. The weight of unexercised overdraft authorities has become a serious handicap to banks in arranging their daily affair with only guesswork to guide them as to the sudden demands that might be made on their already limited liquidity. This must have been taken into account by the Reserve Bank in its credit restrictions. With the substantial reduction in ’ unexercised authorities that may be expected, the Reserve Bank and the trading banks should be able to manage credit issues much more effectively. Further, the reduction of limits will tend to reduce consumer spending, since many persons who no longer maintain this form of purchasing power will have to make arrangements at the time they wish to renew it. In addition, of course, the new charge 'will amount to an increase in the rate of interest on smaller overdrafts, which are largely used for consumer spending.