The Evening Star FRIDAY, JUNE 15, 1928. THE BANK AND THE COUNTRY.

Evening Star, Issue 19893, 15 June 1928, Page 4

The Evening Star FRIDAY, JUNE 15, 1928. THE BANK AND THE COUNTRY.

The speech of the chairman of the Bank of New Zealand at to-day’s annual meeting of shareholders must hold particular interest for tho business community. As compared with some previous speeches, Sir George Elliot’s sticks refreshingly close to ins subject, which is banking. A review of tho general conditions in New Zealand is not omitted, nor even treated cursorily, but it has been compressed into bounds which enable a proper proportion to be observed between matter of primary and secondary interest. This was really necessary on this occasion. From many quarters there have been complaints of the high rates ot interest charged by the banks for advances, and a considerable amount of impatience as lo when a lowering is to take place. The Government has even thrown out hints that cheaper money would be appreciated and would be justified. The main reasons given in urging a redaction are that the balance of trade as been rectified, that there is now a far more healthy ratio between bank deposits and advances, and that tho bal-ance-sheets of the banks operating in New Zealand disclose handsome profits. Sir George Elliot analyses all these arguments with commendable impartiality in the main, admits the cogency of some of them—but very distinctly refrains from any promise of an immediate concession to borrowers. He admits that great benefit would accrue to this and other countries if a permanent reduction of interest rates were brought about, also that there looks like being a general trend in that direction; but ho protests against tho banks being stampeded into acting against their better judgment. Evidently that judgment is that tho rates arc to bo maintained at the present level for a little longer—how much longer he gives us no inkling. Taking separately the grounds for tho outside pressure on tho banks lor reduction of their rates, Sir George Elliot says that the turning of an adverse trade balance into a favorable one (the large excess of exports over imports for the year) is “slowly beginning to have a beneficial influence on the financial conditions of tho country.” The reaction on banking, it is to be observed, is slow. Furthermore, over-importation was not ono of tho main reasons why the overdraft rate was raised. Neither was tho rate raised primarily to stem the increasing demand for advances, per se. Tho banks, it seems, would have been agreeable to accommodate those demands at tho old rates if they had continued to command tho funds to enable them to do it. Their trouble was the relative falling off in the deposits. This was duo to intense competition, both Governmental and private, for command of investors’ money. The Government, though possessing a third interest in the Bank of New Zealand, and having a majority on its board of directors, made use of its Post Office Savings Bank to swell the temporary accommodation it apparently needs rather urgently, if unobtrusively, for its own purposes. And, according to tho chairman, New Zealand is singular in that there are so many firms intruding into legitimate hanking business without observing the precautions or safeguards obligatory on banks. Illegitimate competition for deposits from tho public is thus complained of by the banks, and to meet it the hanks sought to attract deposits by raising the interest rates payable thereon. Ono immediate result was a transfer (or the equivalent of such a transfer) of money lying in the banks at current account to fixed deposit, which cannot strictly bo regarded as increasing the total available by the hanks for lending purposes. This increase, however, was not urgently needed, because the heightened overdraft rates, necessitated by tho higher fixed deposit rates, curtailed tho demand for advances, while the attraction of fresh fixed deposits, independent of the transfer above mentioned, has greatly improved the ratio between deposits and advances. To ensure that improvement being permanent is tho reason why the present rates oro being maintained. Possibly real stabilisation will not be gained while the “illegitimate” competition with the banks continues. Possibly tho business public will be reassured on the point when they realise that the banks themselves dislike the high rates because they restrict banking profits. Their income is doubly affected —by tho shrinkage of advances (due not to the banks’ inability to lend, but to the customers’ disinclination for too dear money) and by the increasing cost to the banks of the funds they trade with. Eight years ago 69 per cent, of money deposited with tho banks was non-in-terest-bearing; now only 49 per cent, of it is non-interest-bearing. Of considerable interest to those concerned directly and indirectly in primary production is tho chairman’s reference to the rural credits schemes of the Government. There is only a proportion of farmers who are in difficulties; those who were established before tho war on reasonably-priced laud are for the most part prosperous. Tho basis of the rural credit scheme was that tho necessary capital for lending to those cramped for finance should be subscribed by the investing public, and especially by the well-to-do farmer. Evidently tho farmer of that fortunate type does nob regard tho security offered by his less fortunate brother as attractive. It has not always been so. Wo could point, for example, to settlors in Ida Valley, made prosperous by irrigation, having invested largely in mortgages on sections in tho Manuherikia Valley in the hope that irrigation there would bring similar results. But the farmers’ subscription to rural credit bonds was negligible, and it was the Bank of New Zealand which, by taking up a large proportion of the issue, enabled the loan to bo fully subscribed. The bank evidently regards the longterm issue as State guaranteed, for the chairman says “ it would appear that tho State is responsible for the payment of interest and principal." But as to tho rural intermediate credit scheme, tho criticism is much more severe. In tho first place, the scheme is redundant; the class of business which would be accepted is that which can be, and is, afforded accommodation through existing outside channels. These particular bonds are explicitly not State guaranteed; and, if farmers have not rushed the long term bonds, m Ml BH* gaarMfeed*

it seems vain for the chairman to express tho hope that farmers who are in a position to do so will assist tho movement by taking up the former class of bonds as they are issued. This section of the speech really looks like an appeal by tho banks to other people to take big risks at high interest, and so relievo tho banks themselves of a class of business for which they have no great liking. Ono may, in fact, regard the part of the speech dealing with rural intermediate credit as a declaration on behalf of the,, banks that they have done their share in helping to tide over the farming crisis, and that others concerned should do their share, by a prompt cutting of past losses and by accepting risks in respect of possible future losses, to enable production to be maintained and increased.