BANKS AND SAVINGS

Evening Post, Volume CXXI, Issue 83, 7 April 1936, Page 14

BANKS AND SAVINGS

BEARING ON INTEREST

INVESTMENT OF TRUST MONEYS

"EVENING POST," April 7. Opportunity is afforded by the Royal ((Commission on Money and Banking, now sitting in Sydney, for commercial and financial interests—additional to strictly banking interests —to express their opinions on the subjects of inquiry* Mr. Spencer Watts, a member of wie Council of, the Sydney Chamber of Commerce, in giving evidence on behalf of that body, and also on behalf of the Employers' Federation, said that the chamber considered the issue of .Treasury bills, pending the collection of income tax, was an appropriate measure until arrangement was made for all such borrowing through the Loan Council. The chamber considered that -the excessive borrowing by the State Government from the New South Wales State Savings Bank was largely the cause of that bank closing its doors in April, 1931. The policy of the savings bank •throughout Australia of accepting large sums on deposits at high interest rates, said Mr. Watt, forced the trading banks to increase their allowance on fixed deposits, and so charge higher interest rates for advances. The chamber considered this was a mistaken and unfortunate policy, as it brought the savings bank into competition with the trading banks, and forced up the charges on loans to borrowers, lhe deposits of the savings bank were generally invested in Government stocks, which resulted in the "freezing of much money that otherwise would be available' for primary production and industrial purposes. A large proportion of the money in savings banks was in excess of what could be regarded as "savings" when these banks were originally established. A large t number of accounts were probably of £500 and upwards. Much of this (money should be available for investiment in other securities. , Mr. Justice Napier, the chairman of the Commission, said he saw no valid objection to depositors in the savings bank getting as much for their deposits as the bank could earn for 4hem, provided the policy of the banks ) did not interfere with the "liquidity" 1 of assets which might be required on ! demand. THE COMMERCIAL VIEW. Mr. Watts said the view of the Chamber of Commerce was that the savings f banks were at present unduly competing with the trading banks for deposit mfney, and that this, was largely Te; isponsible for increasing the lnteres. of loan money required for business i and developmental purposes. The Sydney Chamber of Commerce cons\dered7said Mr. Watts, that the ex■tension by banks of their practice of ■long-term advances against the security ■ of capital assets, in support of both !rural and manufacturing, industries, was helpful in developing both primary . and secondary industries to a very considerable degree. The fact that the : banking system came through the crisis iwith apparently undirmnished strength i indicated that this policy was justified. THE BILL MARKET. Mr. Watts said that the. Sydney ; Chamber of Commerce considered that I there was not a sufficient demand at • present to support a market foi Treasury bills. Such a practice would involve an organised money market, wnn facilities for discounting and rediscounting bills.-and implied the declaration by a central authority, such as a central bank, of a discount rate at regular (say, weekly) intervals. it was considered highly desirable that •there should be a more extensive use tof internal trade bills. ' Heavy stamp duties discouraged the be used in Government finance in ways similar to overdrafts in business finance, and not be used for capital expenditure or take thes place.of longterm loans. Treasury bills should be used only as temporary accommodation for revenue in sight, otherwise they might become a dangerous inflationary volume of Australian Treasury bills now operative could only be liquidated out of revenue or by funding on long-term loans. The chairman: There are^£s3,ooo,ooo of short-dated Treasury bills in Australia, and about £33,000,000 in London. Do you think there is any possibility of that being met out of revenue in the "Mr* Watts: The Chamber of Com.merce does not think that practicable; in fact, the chamber has repeatedly asked for a reduction in taxation. MORTGAGES UNPOPULAR. Mr. Harold V. ■- Douglas, general manager of the Perpetual Trustee Company, Ltd., Sydney, stated that it was not considered desirable to widen the provisions of the Trustee Acts to enable trustees to invest trust money more widely, as his company considered that ■ was better left in the control of testators rather than to have the matter definitely settled by legislation. _The supply of money available for Investment in sound mortgage securities.'now exceeded the demand; This • was due, among other things, to theoperations of the Moratorium Act and ' the heavy special taxation on private investments. The average net return • from estates managed by the witness's company was only 2J per cent...a year. When the Moratorium Act, 1931, came into force the company ceased to consider applications for loans on the security of real estate. In 1933 lending on this security was recommenced on the basis of 50 per cent, of satisfactory valuation, which was recently increased to 55 per cent.

In 1928-29 the Perpetual Trustee Company was lending at the rate of £900,000 a year, but that had now dropped to about £20,000 yearly. Despite the restoration of the personal covenant in new contracts, the operation of existing moratorium legislation prevented freedom of sale and purchase of real estate. The general trend of recent legislation had almost driven trustees and private lenders out of the business of lending on mortgage.

Mr. Douglas further stated that income tax was an important factor in fixing mortgage rates on trustee loans, as frequently to reduce the interest rate below 5 per cent, the net return from mortgage investments, with all the added risk, would, in most cases, represent only a slight increase on the present net return from Australian consolidated stock.

Banks and insurance companies could quote down to 4J per cent, for loans, as they got special concessions regarding income tax. At 5 per cent, a year interest on loans, the return to beneficiaries in some estates was less than 2J per cent. net. Mr. Douglas added that Treasury bills represented practically promissory notes. His company was doubtful whether such bills would represent an advantageous method of investing trust funds. If such bills did not carry interest there would be no return by way of income on the investment therein of trust funds.

SOUND BUSINESS PREFERRED. Mr. E. V. T. Whittle, assistant

manager of the Permanent Trustee Company of New South Wales, said requests made to his company for rural loans were generally for large amounts, and on that ground some reluctance was shown in accepting them. Until 1928, Mr. Whittle's company let 60 per cent, of approved valuations; but since 1930, suitable mortgage securities offering were few and far between. No advances wero made on mortgage in 1932. but in 1933 and 1934 a few were made at rates from 5 to 54 per cent., and in 1935, at from 4J to 5 per cent. The company had had many applications recently for loans for house building, but the securities were not always acceptable. He-understood that most of the finances for building recently were supplied by banks and insurance companies.