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Thursday, 15 October 1964


Mr IRWIN (Mitchell) .- I wish to speak tonight about the bank overdraft system. An increasing number of people seem to be of the opinion that if we were to change the system of bank overdrafts for one based on fixed loans;, the banking industry would be able to respond better to changes in monetary policy and the effectiveness of monetary controls would be improved.


Mr Daly - You are the toughest bank manager of the lot.


Mr IRWIN - Evidently you have not done business with me. In my opinion a changeover to fixed loans, far from having the desired economic effect, could easily work in the opposite direction and could add substantially to the mass of uncontrolled credit funds available for personal expenditure, for inter-company borrowing, investment in hire purchase and other types of lending, both public and private. In the course of this speech I shall demonstrate how this could happen, but before I do I think it is desirable for us to see the overdraft system in proper perspective.

The overdraft limit has been a feature of Australia's banking system for many years, perhaps longer than anyone living can remember. It permits a borrower to restrict his use of bank money to such amounts as he actually needs from day to day. The bank, in turn, charges him interest only on the amount drawn each day rather than on the amount which it keeps in reserve so that he can draw it should he wish to do so. Overdrafts are without doubt the most flexible and most economic type of lending device yet developed by man. Many of the farms and big business in Australia have been enabled to establish themselves because of this method of overdraft limits which is peculiar to Australia.

In a country such as Australia, which is subject to vast fluctuations in seasonal conditions and in the prices that can be obtained for our products overseas, the overdraft is almost an ideal type of loan from the borrower's point of view, although it may not at all times be so suitable to the banks. At the present time the advances of the major trading banks total about £1,200 million, whilst limit commitments are some £700 million over and above this figure. The figures for July 1964 are: Overdrafts, £1,184 million; Limits, £1,902 million; Difference, £718 million.

Because there seems to be a big difference between overdrafts and limits, some people in this community consider unused overdrafts something of a time bomb likely to blow up in our faces when things get tough, particularly when there is a credit squeeze on. Well, a credit squeeze is on the banks right now, but I do not see any significant changes taking place in the relationship of overdraft limits to actual overdrafts. Indeed, the record is one of great stability. The Reserve Bank's most recent Statistical Bulletin, that for August this year, shows that for the three years during which the figures for overdraft limits have been published there has been a remarkably consistent ratio of overdrafts to limits. For example, average overdrafts for the year 1961-62 were £1,002 million and overdraft limits at July 1962 were £1,733 million, the relationship of one to the other being, in round figures, 58 per cent. Average overdrafts for 1962-63 were £1,061 million while overdraft limits at July 1963 were £1,821 million, again a relationship of 58 per cent. Average overdrafts for 1963-64 were £1,106 million and overdraft limits at July 1964 were £1,902 million, the relationship again being about 58 per cent. These figures, and my own experience in a lifetime of practical banking, indicate that the dangers of overdraft limits being excessively used are being greatly exaggerated. We have always had and must always have a substantial excess of limits over overdrafts and if this constitutes a time bomb then all I can say is that 1 have never seen it go off in my lifetime. Indeed, I am not sure even that it has a fuse in it. lt seems to have become fashionable over the last couple of years for academic economists in particular to worry about these unused limits. The figures about overdrafts and limits were not published by the Reserve Bank until two or three years ago. The economists did not know the position before that time and consequently did not show any great concern about it. The making available of these figures to our economists has been almost like giving a thermometer to an excitable young mother; she takes the children's temperatures, panics at even small variations and calls for the doctor. These days we tend to judge the condition of members of our very healthy banking family according to the figures of bank limit commitments, and when we see any rise at all we call for the doctor. This particular doctor then limits the amount of work he permits our banking patients to do.

The main reason why some people want to change the overdraft system to one of fixed loans is that the overdraft method, with its unused limits, allegedly does not allow monetary policy to be implemented quickly enough. It is said that often the trend of advances is so slow to change that policy could be due for reversal even before it can be implemented. This misunderstanding comes about because most of these theorists have never actually worked in an office, factory or bank and have not" had actual experience of banking and of the way in which people actually borrow money.


Mr Daly - Have you had any experience?


Mr IRWIN - A little - just on 49 years. Implementation of banking policy is thus, say the critics, always too late and often works the wrong way. There is, of course, often a substantial and unavoidable time lag in the overdraft system between a bank manager telling his customer he can get a loan and that customer actually drawing it in full. Again this is to the customer's advantage. The lag is often of many months' duration and frequently we see in Australia a situation in which a bank, in accordance with official policy, is doing practically nothing by way of new commitments although its advances are nonetheless increasing. This is because the bank manager has made commitments to his clients three, four or five months previously, but they have not availed themselves of their overdrafts until after the new edict has been issued. Therefore, say the academics, let us scrap the overdraft system in favour of fixed loans. In the first place, fixed loans will be dearer for the customers of banks because they will have to draw their loan in full as soon as it is approved and pay interest on the total amount of the loan for the whole period. They will pay interest on not only the amount actually needed at any one time but on the whole loan for the whole period contracted. By drawing loans in full, substantial deposit funds would be created. The community's spending would be greatly encouraged and the Reserve Bank would find that customers of trading banks, and the community at large, would experience a big upsurge in freed credit funds. These newly created funds would be completely outside the control of the monetary authorities and would be pure dynamite so far as potential inflation is concerned.

To create a mass of new credit funds in this way would be to promote the very situation which it is desired to avoid. The public would have to pay more, too - particularly the farmer and the small businessman who cannot raise fixed capital and rely on their bank to stand by them through seasonal variations. The borrower from the Australian banking system enjoys the luxury of having his bank hold reserve funds for his possible use without, in most cases, any charge at all. There is a good case, based on correct use of money and the proper channelling of Australia's limited financial resources in the right directions, for some small fee to be charged by the banks for keeping funds in reserve for possible use. But do not let us talk of scrapping wholesale the flexible time-proven overdraft system which gives the small man the best of both worlds by allowing him the financial luxury of having his bank first hold money in reserve for him for no charge at all and, secondly, charge him the lowest rates in Australia on a daily balance basis when he does use it.

Whilst I believe that the ovedraft system should not be scrapped out of hand I believe also that there is some scope for a proportion of fixed loans within our banking system. Indeed, the banks have always made fixed loans where circumstances suggested that a customer's best interests would be served in that way. Loans to municipal and shire councils are a case in point. Now that the Reserve Bank at long last acknowledges that long term lending should be a function of the banking industry we have seen considerable use by banks of the Term Loan Fund with its fixed loans for export and developmental types of undertaking.







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