GRANTING OF CREDIT

Wanganui Chronicle, Volume 79, Issue 13, 16 January 1936, Page 11

GRANTING OF CREDIT

VARIOUS KINDS OP BISK Air. J. Gibson Jarvie, who is arnei ciatcd with companies, which, have ad- ' vauccd. about £58,000,000 in the form ' of credit to enable goods to be moved, gave an address on “Medium and Bong Term Credit” at a recent session of t'hc Incorporated Accountants’ Students’ Society of London. Much of the lecture cc-uld apply, to conditions ia New Zealand. “We hear a great deal,’* he said, “about the need for providing credit, particularly for small companies, but that the demand is made by genuine and deserving borrowers'! am not yet prepared to believe. And in spite reiterated statements to the contrary, 1 believe that it is not so much that finance and credit are not available as that there are not enough creditworthy people seeking credit and willing to use it. “At any rate, the evidence at the moment suggests that much of the criticism of the present financial system conics from the potential borrower whose proposal has not been favourably received or from people who have not thoroughly examined or understood all the factors of the position. “Many of the suggestions contained in communications to- the press if they were carried out could only be carried out by a Government institution disbursing Government money. No private investor or investing company would be justified in taking the richs whijCh many of these critics assert should be taken. 1 would go a step further and say that no Government, institution even would have the right to take the risk, since if the Government lost its money it i* the taxpayer who would have to pay the bill. In other words, industry on a profitable basis would ultimately have to pay for the speculative businesses of others which had failed and without any corresponding or adequate reward. The possible return from good loans would never pay tor the bad loans. “It is suggested that unsecured loans of a spccualtive or semi-specula-tive character might be made quite safely to the individual, or company, who could be regarded as a good moral hazard. It has been suggested that the regard should be a share in the 'equity, i.e., in the earning capacity of the business or the company as and when profits are made and that part of the security could be the representation, of the lender in the business or on tho board of the borrower. That is not feasible. Alost of the loans would be too small to justify the expense of a competent observer, and as I know from experience the majority of the prospective borrowers are unwilling to pay more than a nominal rate of initcrei’t. Only a negligible percentage of potential borrowers are willing to give ordinary share or participating rights. Preference share or debenture rights in such cases have no real value in the event of a loan proving ‘bad? I 4 ‘Any company formed to finance new businesses where no adequate mh i curity ta available would be simply j courting disaster and almost bound to I fail. It would be almost completely at I the mercy of the borrowers.”