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.