BANKING INNOVATION

Poverty Bay Herald, Volume LII, Issue 17132, 7 September 1926, Page 7

BANKING INNOVATION

RURAL MORTGAGE SYSTEM BANK OF N.Z.’S SCHEME TAXATION OF NEW BRANCH (Parliamentary Reporter.) WELLINGTON, this day. Described by the Minister of Finance as one of the most important and interesting pieces of legislation which the House had considered tor some time, the Bank of New Zealand Bill came up for its second reading last night. The Hon. W. Downie Stewart, Minister of Finance, expressed this opinion, adding that liis reason for saying so was that it led the way tor financial institutions to adopt a system ol mortgage which must add to the security ot land finance, and lie hoped it would encourage other institutions to adopt similar measures. The wider adoption of the long-term mortgages in place ol the short mortgage system must make for fixed settled conditiones of fanning. It was an innovation for joint stock banks, and it might be copied in other countries. Ordinarily, banking was based on a system of short-call money, and in entering on long-term mortgages the bank must establish a separate department, though it could use its own internal machinery. The Banks Bill had been delayed until the Rural Credits Commission report was available. Nevertheless, the bank’s scheme -seemed at the outset to lie likely to have far-reaching results.

THE SIX PER CENT. RATE

The bank’s proposal to make the scheme workable by transferring profits from the ordinary branch so ns to secure a low fixed rate of interest, deserved some recognition from the State. With the proposed new long term share capital, and three times that amount in debentures, the bank would raise £5,625,000, which would be loaned at a rate not exceeding six per cent., which was a little below the outside mortgage rate, but slightly above tin* State Advances rate of 5J per cent.. At present ordinary capital was earning considerably above that rate, and the new share capital—provided no concession was made by the State—would, after allowing for taxation, produce not more than £4 11s per cent. The question arose of what was the best method of ensuring that the bank's shareholders would get 7A per cent, on new capital. After careful consideration, the Government had decided, and lie thought the House in tlie recent debate had approved. that, the best way to meet 1 lie difficulty was for the Government to take its one-third proportion of the new share issue at 6 per cent., rather than to consider t lie question of making a tax concession. The result came to within a few pounds of what the bank asked for to enable them to carry out. the sclieme, in order to provide the difference between shareholders’ capital and the amount necessary to make the new issue attractive.

TAX ON RURAL PROFITS

® It did not appear in this Bill, continued Mr. Stewart, hut a clause would appear in the Appropriation Bill, under which the Bank of New Zealand, in respect to profits from its rural credit department, would he taxed, not as a joint stock bank, but as if it were an ordinary joint stock company, at 4s 6d in the *£. In considering the concessions which would be given to other instiT tutions to put them on the same basis > as the Bank of New Zealand, so far as taxation as companies and not as banks was concerned, it was easy to put a clause in the legislation vet to come down, providing that if any hank adopted a similar sclieme with a maximum rate of interest of 6 per cent, it should be entitled to be taxed on the basis of company taxation. Other banks might not, of course, he able to subsidise a special branch out of ordinary profits, but the Government proposed to insert that provision in the Appropriation Act to encourage other institutions to adopt' the same policy as the Bank of New Zealand. The Minister, explaining the provisions of the Bill, said the Government s proportion of the new long term mortgage capital was £458,750, which it would take up and receive preferential a dividend of 6 per cent. The Government’s proportion of one-third of the bank’s capital would not be disturbed. Answering questions as to why authority was being taken to increase the directorates’ remuneration from £SOOO to £6OOO, the Minister suggested that it might Ire due to the directors believing that they were undertaking greater responsibilities. Mr. J. McCombs : It might lie due to the high cost of living.

“FINANCIAL BUSH RANGER’’ (Per Press Association.!

The Leader of the Opposition, Air. H. E. Holland, said his party favored the Bill, because they felt more might come out of the sciieme than out of the Government scheme of rural advances. It meant more money, but not cheap money. What struck him was that all through the piece the interests of the banks were to be paramount over tbe interests of everyone else. This was shown in that when the general pianager was before the committee he said the whole scheme would go by the board if the bank did not get a concession of £6OOO-in taxation. Further, while the country was out to get 6 per cent, for its capital, the bank insisted that its shareholders should receive 7-2 per cent., which was a fairly high rate of interest. There might be speakers who wfluhl say tbe bank hail been of great service to the people, but others could say that tbe people bad been of great service to the bank. More money was wanted and if the bank took up tbe position of a “financial bush ranger” then he supposed tbe people would, under tbe present circumstances have to put up with it. Mr. G. W. Forbes said that there was little doubt tbe interests of the bank were the first consideration in tbe scheme, and there were many directions in which the hank might have made concessions to the’ public. However, be welcomed tbe Bill because it would re lieve the position considerable, so far as the settlers were concerned. He approved of tbe proposal to restrict tbe dividend to 7i per cent, and it would be a goal tiling if tbe same restriction applied to their general shares and that the bank should return tbe balance in concessions to customers. SIR JOSEPH WARD APPROVES. Sir Joseph Ward said the trouble in New Zealand was that so many people wanted money and in larger sums than most financial institutions could lend. This situation seemed to be realised by tlie management of the Bank of New and the fact was that they were now preparing to do banking business on a very different basis to that ever cbr'.e before, and this experiment would be watched with toe greatest interest all over the woild. The bank was finding a very large portion of the money to finan n e the scheme, and its shareholders were tbe neonle who were taking tbe risk, but if tbe bard was as well managed in the future as it. lind teen since 1894, be bad e'’orv confidence the scheme would be a success. The result would greatly affect the discussion for and against a State

Bank for, as the years went on, he was convinced that the people would mole and more come to regard the Bank oi New Zealand as a semi-State hank. Mr. J. A. I ,ee said the scheme would result in diverting pounds into the colters of the bank and away from local bodies. There was nothing scll-sacri lieial about this proposal. So far ns tbe bank was concerned, it was purely a matter of business and be hoped no one would bail the hank and those behind tbe bank with honeyed phrases as philanthropists. Mr. W. S. Glenn f bought I bat. this was a piece of as good legislation as was ever passed hv the House. It would have a real steadying effect <>n the finances of Hie Dominion. The Minister, m reply. said that he thought tbe L-ader of the Opposition was mistaken in wind be said with regard to tbe bank demanding a concession of P'OCC in taxation. He was under the imnression that the bank said that it it could not get a confession it would require to lend the money at tier cent. Mr. Holland : He said the bank would not lend the money at all. Tbe Bill was read a second time.