The Evening Star MONDAY, MAY 12, 1924. COST OF LOANS.

Evening Star, Issue 18631, 12 May 1924, Page 6

The Evening Star MONDAY, MAY 12, 1924. COST OF LOANS.

A question’ wliicli lias been canvassed in business circles of Into was mentioned recently in an interview with a Dunedin sharebroker on the subject of New Zealand’s successful loan dotation in London, Ho stated in effect that money which would be verv welcome for trade development, industrial enterprise, and the expansion of various activities was being diverted in other directions. One of those channels, lie mentioned, into which money has been flowing is local bodies’ loans. Municipal corporations, harbor boards, and hydro-electric power boards all over New Zealand have been inviting the public to buy their debentures, and this appears to be a favorite form of investment, whether the sums at the investors' disposal are large or relatively small. The rate of interest is attractive, the security is usually considered good, and there arc often other considerations, of some of which it is possible the Taxation Commission may recommend revision. At one time a great deal of the money for such purposes came from abroad, being borrowed by the Government in London and reloaned under the provisions of the Loans to Local Bodies Act, while in some cases the more important bodies in the larger towns borrowed independently of the Government, approaching the London market direct for funds. During the war whatever borrowing could not be avoided by local bodies bad to be done by other methods, ami the raising of loans locally came into vogue, and seems to have been permanently established. It would appear to bo tho case, that in Dunedin, more than in most other towns in New Zealand, money accumulates at a rate greater than would suffice merely to keep abreast of the requirements of the immediate district, for if report bo true a good deal of Dunedin money has been finding its way to the North Island for local development purposes there. With the expression of opinion that much of this money might be profitably employed nearer home, them was a suggestion that the Government should again push its system of loans to local bodies and call a halt in tho latter’s present, mode of borrowing. It is just possible that the Government, which is understood l to have yet not let go its grip of the handle of tho economy axo, is not particularly anxious to swell its borrowings abroad by resumption of former activities in the direction mentioned, fairly profitable (hough these may have been to it. There used to he hints that limits would have to be set to tho demands which local bodies were making on the Government’s funds earmarked for such purposes, and with tile springing up of power boards in various parts of the dominion it is probable that now the Government would have a still more embarrassing number of clients if it sbuiul announce its readiness to loud on belter terms than those now current. Well, as the Government has recently borrowed in London, it is doubtful if it could da this mid show tho profit of 1 per cent, which lias been mentioned as the intermediary’s fit remuneration for guaranteeing the security and other services. That this appears to bo the case is indicated by the suggestion of the prohibition of the existent system of local borrowing to enable the other to bo substituted. However, in its latest loan the Government has made no provision for funds to relend to local bodies, though that it could easily have got sufficient money in London is unquestionable, seeing that tho amount sought was over-subscribed nearly fourfold. The Government’s policy appears to bo a compromise between tho two schools of finance where borrowing operations are concerned—those who advocate an influx, of fresh capital by borrowing abroad, and those who favor raising loans within the dominion and thus keeping the interest in the country, instead of sending it abroad annually.

A Christchurch contemporary devoted to commercial topics has been making comparisons between the expenses of raising loans in London and within the dominion. In London, it states, loans have to bo underwritten, and the 1 underwriting commission is 1 per cent. The charge for obtaining the underwriting is 5s per cent. The broker who brings in the subscriptions charges a commission of 5s per cent., and there is a similar commission to tho bank which receives tho applications and does other work in connection with tho issue. Stamp duty is 11 per cent, if it is compound—i.e., if future transfers of the stock are to be free of stamp duty—but in this particular case tlrat exemption has nob been sought, and a lower duty was paid. Commenting on expenses, usually amounting to about 3 per cent, of the whole loan, tho authority quoted states that “ the London charges appear high, but that is the custom of London and is the result of decades of experience. Competition is keen in London, and if the business could be done cheaper it would bo. The underwriting charge, apart from the stamp duly, is the heaviest, but the charge, it is claimed, is well worth tho risk. . . . The underwriter has a margin of 1 per cent.—that is, if he trades off his holding at 1 per cent, discount ho gets off without loss; but if tho loan goes to a discount of more than 1 per cent, he loses. . . . Loan issuing in Now

Zealand is not so expensive, for there is no stamp duty and no underwriting charge. A commission of 5s per cent, is paid to brokers for bringing in subscriptions.”