OVERDRAFTS IN THE COUNTRY
In the preceding chapter we discussed the “loan account” and its
mysteries, and now we are brought face to face with the country
practice of granting the customer a “limit.” The banker, we will
assume, agrees that, upon his depositing certain securities, he _may_
overdraw his current account to the extent of £1,500. This sum, then,
is the client’s “limit” which he is not supposed to exceed, and if he
draw a cheque that would, when presented for payment, overdraw his
account beyond the agreed figures were the banker to honour it, the
latter is entitled to return the document without notice. As a rule a
bank reserves to itself the right of calling in a loan or advance at
any moment, but in practice reasonable notice is always given.
Though the customer has arranged for a “limit” of, say, £1,500, it is
quite possible that he will not overdraw his account to that extent;
but at those seasons of the year when his outgoings are always in
excess of his receipts the balance against him at the bank will draw
closer to his limit. If, however, his business be in a healthy
condition the corner will soon be turned; and as his payments in begin
to exceed the cheques he draws, his indebtedness to the bank speedily
sinks below the average. Each payment to his credit reduces his debit
balance, and every cheque debited, of course, increases it, but as the
banker charges him a rate upon the sum owing at the end of each day,
it follows that the customer only pays interest upon the actual money
he has borrowed--not upon the amount of the “limit” as does the London
client upon the amount of his “loan.” This arrangement is much the
fairer to the borrower, who, however, must take care that the banker do
not charge him a high rate of commission upon his turn-over under it.
We can now consider the rate of interest a customer should pay on an
advance which is more than covered by marketable securities that can
be sold on the Stock Exchange at a moment’s notice. Most provincial
towns, we know, are over-banked; and as each banker is the rival of the
rest it follows that a person whose cover is tangible can, by playing
off the one against the other, obtain very fine rates. But he may not
care to adopt these tactics; still, as the method may appeal to some,
it would be a pity not to dwell upon its possibilities, for it is often
undoubtedly effective where argument fails. The would-be borrower
of this class may be referred to the table of rates in Chapter VII,
and to the remarks made concerning well-secured advances in London,
as, competition for a secured overdraft being even more keen in the
country, where tangible securities are less in evidence, he should
experience little difficulty in coming to a similar arrangement with
reference to the rate of interest.
For instance, suppose a man who possesses a good list of marketable
stocks and shares wishes to borrow £5,000 from his banker, and calls
upon the branch-manager, who at once expresses the opinion that his
directors will have no hesitation in granting his request. They next
discuss terms. The manager, who is a humble servant of the company,
and who, moreover is anxious to pass the rest of his days in that
honourable capacity, looks at his customer, thinking hard the while,
and then, trusting his man lacks business experience, suggests 5 per
cent. per annum on the overdraft and ⅛ per cent. on the turn-over. The
turn-over of an account consists of the cheques, bills, etc., debited
during the quarter or half-year, and the customer, therefore, is asked
to pay a commission of 2s. 6d. upon each £100 debited in his pass-book.
There is nothing very remarkable in this request on the part of a
dealer in cash and credit who is selling his wares, and to express
surprise is to display a lack of knowledge of business procedure, but
to agree to his proposals would betoken a lamentable ignorance of the
market.
Should the Bank rate be at 4 per cent. the customer would endeavour not
to pay more, for his securities do not give him that return, and he has
the option of selling them. And as to paying a rate on his turn-over,
he knows that if he make application elsewhere he can probably find a
banker who will forego that charge, so he either refuses to entertain
it or else agrees to pay a merely nominal sum. With a higher Bank rate
than 4, he will try to obtain his advance at ½ below the official
minimum; and if the Bank rate be low, and loanable capital therefore
cheap at the moment, he can suggest “½ per cent. below Bank rate with
a minimum of 3½.” Here, again, reference may be made to the previous
chapter. Of course, if there are only two banks in his town, and
consequently but little competition, he will not find the manager so
ready to listen to him, but he certainly should not pay more than Bank
rate when it is above 3½, while he will remember that the manager’s
advice, if he be so rash as to express an opinion, is not disinterested.
We next come to the customer whose “limit” is covered by marketable
securities and deeds of house property or land. The banker will have
the property valued by his own man, and then perhaps advance up to
about two-thirds of the value placed upon it after the deeds have been
examined by the bank’s solicitor and formally deposited, the customer,
of course, paying all expenses. The securities, if they are a fairly
good list, he will advance against to the extent of about 75 per
cent. of their market value, thus leaving a margin of 25 per cent. in
his favour to cover the risk of depreciation, for they take care of
themselves--these bankers. The majority of advances in the provinces
would be made against securities and deeds in varying proportions, and
it is as well to remember that the larger the proportion of tangible
securities the smaller should be the rate.
A banker, it need not be said, does not want to be bothered with a man,
however good his securities, if he think that there is the probability
of his having to call in the advance or to claim against his estate in
the Bankruptcy Court; and though a customer cannot deposit marketable
stocks and shares to the full extent of his advance, but is compelled
to offer deeds and securities, as in our illustration, his credit is
often so good that many other bankers in his town would readily listen
to his proposals, and be only too glad to get his name on their books,
perhaps even at a small sacrifice. Such a person can make a very close
bargain with his banker, and would not, for instance, think of paying
5 per cent. when the Bank rate is at 3 or under. He would, in fact,
especially if he were conducting a large business, probably be in a
position to make as good terms as the man whose securities are wholly
tangible.
The manager, of course, let the Bank rate be what it may, will
endeavour to obtain from 4½ to 5 per cent. upon the overdraft of an
account thus secured, and to charge a rate of from ¹/₁₆ to ⅛ per cent.
upon the turn-over; but if the customer show fight, and losing the
account may not be thought desirable, because of the local influence
he possesses, then, rather than risk his applying elsewhere, the
agent usually lowers his rates, for he naturally does not enjoy the
thought that esteemed clients are perhaps paying little calls upon his
rivals, and thereby advertising his own unpopularity. When the rate
of commission is the bone of contention the customer’s first aim will
be to pay no commission whatsoever, and to at least arrange for his
advance at Bank rate with a minimum of 4 per cent. Probably he may do
better with reference to his interest rate; and, if he finds that the
manager holds out for commission, then he can agree to a nominal charge
of from one to five guineas or so each half-year according to the
volume of his business.
We now have to discuss the position of those persons who can only
offer their banker the deeds of house property, land, and those other
securities for which the market is a purely local, and, therefore,
uncertain one. A banker, whose deposits are mostly payable at call and
short notice, naturally prefers to advance against those securities
that are quoted on a Stock Exchange, and does not care to lock up a
large proportion of his resources in house property, etc., of which he
cannot readily dispose in an emergency. But tangible securities are not
always to be had for the asking; and, as he must employ his capital in
order to pay a dividend, he is compelled to advance to a certain extent
against, from his point of view, the less desirable securities such as
houses and shares in some local company, though he always prefers to
deal with the man who can deposit the more easily negotiable variety.
Further, a prudent banker will only devote a certain amount (and that
a relatively small amount) of his resources to advancing against the
deeds of houses, land, and so on; and as the demand for overdrafts
against this class of cover is always greatly in excess of the supply,
it follows that those persons who borrow upon it have to pay high rates.
We have seen that the client who possesses tangible securities can,
broadly speaking, make his own terms but it is otherwise with the man
who wants an overdraft for business purposes against the deeds of a
house he owns; and he it is who is compelled to pay 5 or 5½ per cent.
per annum interest, be the Bank rate what it may, and ⅛ per cent.
on the turn-over of his current account; for he will not find the
competing banks anxious to secure his business by lowering their rates.
Should his credit be good, and his business be considerable, he might
succeed in reducing his commission rate to ¹/₁₆ or even ¹/₃₂ per cent.,
and, of course, he will make the attempt, but it would be unwise to
more than wish him success in his endeavour. A really large tradesman,
however, whose securities consist of this variety, will sometimes find
a bank-manager anxious to secure his account, because he thinks he may
influence others in his favour, and such a man will not pay high rates
before he has at least sounded two or three managers of well-known
banks and discovered that their terms are not more liberal. He may even
find that he can get his account worked free of commission, or have
the one he is paying appreciably reduced.
Again, a man can mortgage his property, but, as a rule, he prefers
to obtain a “limit” on it from his banker, more especially if he
intend gradually paying off the advance, as, should he borrow £500
on mortgage, he will have to pay a rate on that sum, but when he
obtains a “limit” of £500, and his account is only £250 on the wrong
side, he pays on the smaller amount only. As a rule, a solicitor acts
as middleman between a mortgager and mortgagee; and the borrower
might remember that solicitors, when advancing their clients’ money,
or, indeed, when they act in any capacity, are quite as human as
bank-managers, and that it is always advisable to higgle with them over
the rate, which, of course, should be based on the value of loanable
capital at the time. The deed usually stipulates for six months’ notice
on either side.
A customer who is desirous of obtaining an advance upon property which
already has a first mortgage upon it, will not find the banks either
sympathetic or eager to assist him; though if his banker be “in” with
him he will, of course, accept any additional security which is likely
to lessen his risk or minimize his loss. In the usual course of his
business second mortgages and equities of redemption are not thought
desirable, and then, again, the law does not give a second mortgagee
all the protection it might.
The current-account customer, who calls upon the bank-manager with the
object of obtaining an overdraft against property, will generally be
asked if his life is assured, and if he reply in the negative, he may
be requested to assure to the extent of the “limit” the bank is ready
to grant him, and to deposit the policy as collateral security with
the deeds. Many men of small means assure their lives, and a banker,
provided the office be a good one, will generally advance up to the
surrender-value of the policy. This he ascertains by applying to the
assurance company, which tells him at what figure they will commute it.
The rates charged upon this class of security are high.
Where the customer’s overdraft is only partially secured, he must
make the best terms he can for himself; and, as there is practically
no competition for such an account, he will probably have to pay from
5 to 6 per cent. per annum interest and from ⅛ to ¼ per cent. on his
turn-over. These are the maximum rates, which, no doubt, he will
attempt to reduce, though with what success must remain problematical.
The person who obtains an overdraft without security must, as a rule,
give thanks, and pay up with a light heart, for should he apply
elsewhere he would be received with open-mouthed astonishment. A
good name in the banking world implies that its owner is worth some
few thousands of pounds; and though, in the moral sense, its value
is considered beyond price, directors, while appreciating it in the
abstract, regret their inability to safely ensconce it within their
safes, and therefore, as practical men, their powerlessness to advance
against it unless backed by collateral securities.
Lastly, a few words may be said anent personal security. If you have a
wealthy friend who is willing to sign a promissory note with you, or to
guarantee your banker against loss up to a certain sum, an overdraft
can soon be arranged; but such a request puts friendship to the
severest test, and it may be extremely difficult to find your friend at
home should he as much as suspect the reason of your visit.
We can see that competition is centred around the safe business, and
that though those persons who possess tangible securities can make very
close bargains, the less desirable is the cover from a banker’s point
of view, other considerations being equal, the higher are the rates
the customer will probably be asked to pay. The man who possesses the
right class of securities should, therefore, take them to the cheapest
market, and the owners of the less marketable varieties might remember
that from 4½ to 5 per cent. per annum on the overdraft and ⅛ per cent.
commission on the turn-over are very full rates, which may often be
considerably reduced when the customer, whose credit is good, does a
large and profitable business.
The only remaining subject for discussion is the relation that exists
between the bank-manager and his directors, who confine his power to
very narrow limits. The city-manager, for instance, at the head-office
of a London joint-stock bank, might be empowered to grant loans to the
extent of from £2,000 to £3,000 without first obtaining the consent of
the board. Any application in excess of his “discretionary power,” as
it is called, would have to be submitted to the directors, two or three
of whom, during certain hours, are always in attendance each day, in
order to deal with those requests for large loans where an immediate
decision is essential, while a full board would probably sit twice a
week. The board, of course, would be asked to confirm the decisions of
the “daily” committee, and from time to time the loans granted by the
city-manager would be subjected to criticism by that body.
At the metropolitan, suburban and country branches the “discretionary
power” of the agent or manager would be based upon the amount of
business transacted at the branch. In a small town of from 20,000 to
30,000 inhabitants a manager might have power to grant, when necessary,
loans to the extent of £350 and under, without first obtaining the
sanction of the board. All applications for advances in excess of
his power would have to be immediately submitted to the head-office,
accompanied by a letter, describing the nature of the security offered,
and stating the desirability of obtaining or keeping, as the case may
be, the account. This report, in every probability, would be addressed
to the “advance department,” where it would be criticized by the
officials before going into the board-room. Many questions would be
asked with reference to the working of the applicant’s account, his
annual turn-over, and so on. If he came to them from a rival bank then
they would want to see his pass-book, and, were he already a customer,
the manager would send a list of his daily balances and comment upon
his means, habits, etc. Having satisfied themselves upon these points,
the chief of the advance department reports to the general manager, who
submits the application to the board. The process, it will be seen, is
cumbersome and necessarily slow, for it often takes the machine as many
days to give a decision as it does a private banker minutes.
The manager, evidently, has very little real power under this system,
and, practically, the branches are managed from the head-office, the
agent being a kind of clerk-in-charge, who reports to, and announces
the decision of, his directors. Indeed, the rules and regulations are
framed for this very purpose, and the banks make it part of their
policy to effectually hold their managers in check, and to so arrange
the work of an office that but little is left to their decision, while
it is the duty of the accountant to instantly report any irregularity
to the general managers. The average bank-manager, it must be
remembered, has had neither a business nor a financial training, and
it would therefore be extremely risky to give him a large field in
which to make experiments. Of the two evils the boards of the banking
companies choose by far the lesser, and, by allowing him a small
“power,” they tether him like a donkey to a stake, thereby limiting
his grass to the length of his rope.
In a large manufacturing city a manager’s discretionary power would
not exceed £1,000 to £1,500, and in the smaller cities it would range
from £500 to £1,000, while in the provincial towns it would be from
£300 to £500, according to population. Each month the manager, as a
rule, has to send to the head-office a report upon all accounts that
are _over_ his power, together with a separate one relating to bills
discounted, and at least twice a year he must submit a long return of
every overdrawn account on the books of the branch certified by the
accountant and himself. The head-office, in short, watches him as a
cat does a mouse, and criticizes those advances he himself is allowed
to make severely should they not meet with the approval of those in
authority.
Then, again, as though determined that his steps shall not stray from
the beaten track, inspectors visit his branch four or five times during
the course of a year, and, needless to say, the board thinks it neither
necessary nor desirable to advise him of the day one will arrive. When
the inspection is a short one the unwelcome visitor counts the cash,
checks the bills and securities, just glances casually through the
ledgers and then takes his departure, when the atmosphere seems lighter
by his very absence, for exalted officials are a weariness to the
flesh. But during a long inspection, which occurs about twice a year,
the manager has to make a short report upon every overdrawn account in
the books. This done, he gives his report to the inspector, who reads
through his remarks and proceeds to criticize them. Having added a few
words of his own, the visitor posts the bulky report to the advance
department at the head-office, and, finally, it is laid upon the
board-room table. Then the fun begins. The manager, after a few weeks
of anxious suspense, receives a long list of caustic inquiries relating
to certain overdrawn accounts which have failed to satisfy the board,
together, perhaps, with imperative instructions to get such-and-such
overdrafts reduced to certain figures at a given date. Sorely tried in
temper, the poor agent sets about answering the questions put to him,
and then, much against his will, he writes to certain clients whom he
asks to give him a call.
Now, perhaps, the customers of the joint-stock banks will understand
why they receive so many letters requesting them to keep their accounts
at the agreed limit, or even to reduce or pay off the overdraft unless
they can deposit either more desirable or additional security. At such
a moment an irritable person is disposed to regret that “a company has
neither a body to be kicked nor a soul to be damned.”