LONG-DATED LOANS.

Hawera Star, Volume XLVI, 18 June 1926, Page 4

LONG-DATED LOANS.

GROWING IN POPULARITY. BANK PROPOSES TO MEET WANT LEGISLATION TO BE SOUGHT. (Special to The Star.) WELLINGTON, June 18. The question of creating a special department of the Bank of New Zealand for the purpose of making loans on the amortisation principle has had, during the past few months, the careful consideration of the directors, according to what the chairman (Sir George Elliot) told the annual meeting of proprietors this morning. In explanation, the chairman added: We were induced to pay serious attention to this question because it is becoming increasingly evident that the idea of loans that allow principal and interest to be paid off by half-yearly instalments extending over a great tin pi her of years, has become popular among borrowers both here and elsewhere. Such loans are peculiarly suited to the needs of primary producers as well as other classes of the community. At present this class of business is undertaken mainly by the Government Advances to Settlers Department, which is the largest single money-lending organisation in the country. On March 31 last its existing loans amounted to £30,000,000, made to over 60,000 borrowers. There appear to be many reasons why the activities of this Department should not be much further extended. Apart from the political aspect, and from the fact that little revenue by way 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. , ,

PROPOSED SPECIAL OAIPITjUL. In considering the question as to the advisableness, or otherwise, of the bank taking up this class of business, there are naturally important points to be considered. Perhaps the most important is that it would be improper for a commercial bank to lock up any portion of its deposits, dr even its ordinary capital, in loans extending over long periods. As hanks 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 be sought to enable the hank to* raise £1,403,250 of, new capital, to he styled “long term mortgage capital,” and also to raise by debenture issues, as and when required, three times the amount of this special capital.. The debentures would be secured on” the “long term” loans. The amount of loans outstanding would be limited to the amount of the new paid-up 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. The amount of “long term mortgage” capital proposed to be raised is onequarter of the amount of the present capital, so that when all the new capital is raised it will represent one new share for every four existing shares. It may be some years before it becomes necessary to raise the whole of the capital. .

COST AND TERM OF LOANS. Under this scheme it is proposed that loans should be granted by the bank for periods of not more than 36} 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 ibe fixed at-7} per cent, per annum. The rate, of interest to be charged by the bank on the “long term”' loans will be 6 per cent., and is not to be varied except under an Order-in-Counci}. Charging this rate of interest, it is evident we shall not net a return of 6 per cent, from the operations of the long term, loan department, as working expenses, losses and income tax have to be provided for; but we shall ask the Government, in consideration of our fixing the lending rate of these long term loans at 8 per cent., that the income from this department- shall he assessed for taxation on a basis appropriate to the circumstances of the case. 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 the existing capital at present rates, as well as 71 per cent, on the new capital. X MAINLY FOR FARMERS. Jh 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 are 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 shareholders with what-.we have in view, they must- bear in mind that this matter lias not vet been sub. mitted to Parliament. Power will be taken in the Bill to enable the Minister of 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 "of this special new capital should the scheme not be as successful as we hope and expect it to be. In entering into this new activity, we believe and trust that we are serving the best 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 Wales charges 6} per cent, on long term loans, and it is not subject to any taxation whatever.