LETTERS OF CREDIT

Poverty Bay Herald, Volume LV, Issue 17234, 14 April 1930, Page 13

LETTERS OF CREDIT

LATEST TRADE NECESSITY LONDON BANKS PLAY SAFE In consequence of the restricted sale of New Zealand and'Australian products on the world's markets, the usual surplus of funds in the hands of the London banking houses lias been seriously depleted, and one result of this depiction is that the banks arc playing safe in the matter of discounting bills drawn against importers in this country and in Australia. Those importers who have not established credits with their banks for the purpose of trading .with manufacturers in Great .Britain arc now being advised' to do so, as unless letters of credit arc available, the banks are disinclined to continue the discounting of bills. The last Home ina.il brought to a Gisborne business man an intimation which at first glance was rather disturbing, but which turned out to be little more than a notice 'of 1 a change which will not greatly-affect 'his trade at least. The text' of the letter, which was from a London manufacturing linn, was as under:—

"Referring to ours of February .18, enclosing you invoice and statement of account for one bale shipped on your account, and in which we .idvised you that relative documents" would be forwarded through the Bank, we beg to inform you that this bank has returned the documents to us this morning, at the same time intimating that, in consequence of the stringency of London -funds, occasioned by abnormal exchange Conditions now prevailing'"between this 'country and Australasia, they regret that, for.the time being, they "are only prepared to negotiate-such bills as are drawn under credits established by their branches. This, of .course, is no reflection on the credit of the drawees. In the circumstances, we have had to send the documents to another bank, the , which medium, we trust, '*will be equally acceptable to you.?' The explanation of the situation lies in the depiction of surplus funds held by the London banks. Traders whose credit is good with the banks in their own towns will experience no difficulty in meeting the requirements of ; the latest ruling, and there will be no delays in the a'ceeptance of orders or delivery of goods as a result of the change. It is felt in some business quarters that New Zealand traders are being restricted in their operations 'as a result of the downfall of Australian credit;'but if this is the case; there is-'n'd perceptible harm to the general body of business in New Zealand, as no restriction is placed on normal trade movements. The-pro-vision of letters of credit is practised on a hiueh larger scaTe : in the main centres, in the ordinary way, than in towns the size of Gisborne,'where the traders have bei'n "In! the habit of nieeting bills drawn on them by London agents, plus the bank charges for discounting the bills. The banks have how 'applied to' the .smaller country traders the system followed by most of the main-centre firms. Some businesses dealing in a large way maintain funds or credits in Loudon permanently, and by this means arc able to profit by actual cash transactions in their purchases, but the small trader' who sends 'Home an order for current requirements of material would get no benefit from this practice, as

his orders would be too small for fine buying. The majority of the smaller traders have been in the habit of trading on bills, meeting the drafts when taking delivery of the goods, ami the only requirement placed upon them for the future is that they satisfy the local branch of the bank of their ability to pay for the goods when they arrive.

Tho system carried on in the past was one which involved the banks in making advances on the probability tliat the drawee of bills would be able to pay. The depletion of Australian and New Zealand funds in the harfds of the London banks has resulted in a change which definitely indemnifies the banks against losses on bills- discounted.