AGRICULTURAL BANKS.

Otago Daily Times, Issue 19311, 24 October 1924, Page 5

AGRICULTURAL BANKS.

II —HOW THEY WILL AFFECT THE FARMER (Contributed by the Now Zealand Welfare League.) In our last crl iclp we outlined Mr Poison's scheme in general terms. It is obviously based on some of tho many useful forms of credit, loan, and banicing associations, especially designed to assist in financing farmers, which exist in other countries, and, if we may say so. it shows a failure to understand and thoroughly study cill the factors which govern a very difficult question. The schemes in operation abroad differ in very material points and operate with varying success, and there are many failures. Local conditions have to be taken into account. It is therefore dangerous to advocate any particular scheme simply because it has succeeded under conditions totally dissimilar to our own. We believe that the individual farmer will not only not benefit by the scheme, but may become involved in personal loss. In saying this, we are confining our criticism to Mr Poison’s proposal not only in relation to the borrower-shareholder, but also to the abnormal conditions, financial and otherwise, which exist, at present. One of the main pleas put forward by the promoters of the scheme is that the farmer cannot obtain credit on reasonable terms. We doubt whether this proposal really helps in this direction. THE BORROWER’S POSITION. Let us examine this. The mortgagor who borrows £2OOO receives only £I9OO advances, as he has to take up 5 per cent, of his loan in shares, lu addition to this, he may be called upon to pay another £IOO, or 5 per cent., if one of his fellow members makes default. Thus lie can only safely reckon on £IBO3 free of liability, and for this he pays interest (at Si per oent., plus up to 1 per cent. for. administration) on the whole £2OOO. It is true that the value of the shares is ultimately repaid to him when his mortgage expires, hut he receives no interest on this value, though he has paid interest to the bank on that money for many years. He may. however, lose the value of these shares altogether if a fellow shareholder defaults, or if the bank is not well managed and the constitution of the board does not inspire confidence. In the event cf the bank having no cash in hand, it may make the loan by handing over bonds, with face values of £3OOO. In this case the borrower must first pav the bank £IOO for shares, and he then has to raise cash on the bonds. As these' cannot carry more than 54 per. cent, interest, and as money is tight, he is not likely to get the face value, but he still pays tile bank interest on the full £2OOO. If the bond is unsaleable he can only go to his usual banker for an overdraft, which is sure to be at less than face value, and on which he must pay the overdraft rate, which would certainly be higher than 5i per cent, which tlie bond carries.

Taking the cumulative effect of these conditions, especially the fact that he is personally liable im to 10 per cent, of his lean for his neighbour’s default, we do not see how the bank' proposal puts him in a better position that he is now. This mutual liability: for default is doubtless a fine ideal, and if all farmers were equally capable and hardworking if would involve less risk, but we must look at things as they are,, and we fear that in practice it would mean that the capable, hordworking farmers will have to “carry’ the inexperienced and incapable.

DOES IT RELIEVE THE FARMER?

Another plea put forth bv its advocates is that many millions of cash will be required to renew mortgages when the Moratorium expires. As a matter of fact, the lifting of the Moratorium (which is tho principal cause of the will release a great deal of cash now tied up, and anvonc* with reasonable security will have no difficulty in re-arranging or renewing his loans. If the security has depreciated in value and a farmer finds a difficulty in financing his obligations, the agricultural bank scheme cannot help him, because under the rules it can only lend up to twothirds of the present value. On the other hand, if the renewal of loans is difficult because there is a scarcity of liquid iboney ” in the dominion, tho scheme is useless, as it does not create one sixpenny worth of “new " oash—-at the most it only creates “ paper ” credit of a dangerous type. This is so obviously true that we cannot understand why the promoters of this scheme suppose that it will attract cash on bonds secured by mortgages from investors who are loth to lend direct to a mortgagor. ' , , _ , In one ’ direction it must adversely anect the producers and. indeed, the whole country, because the advent of anotner borrowing institution on a market already short of liquid cash will, inevitably make money dearer and raise the rate of interest Had the promoters of the proposal boon able to issue their bonds abroad, and so to introduce fresh capital, the institution of such a tank would be beneficial if soundly managed. In our next article wo shall endeavour to deal with the proposal from tho dominion’s point of view.