It is very difficult and somewhat dangerous to attempt to lay down on paper the rules which should guide a banker in lending money. This is above all the function which a practical business man can alone fulfil with complete success. It may be easy to formulate rules, but in practice such rules are apt to be rather rudely brushed aside. In order to lend money with success, theoretical knowledge is of less importance than those business virtues, such as judgment and knowledge of character, combined with the possession of thoroughly reliable local information such as every bank manager should endeavour to acquire. But although in individual cases theory is subordinate to practice, yet in dealing with transactions in the mass some rule of conduct is necessary, or a large bank will soon find itself in difficulties. The branch manager will often find that local conditions render necessary the lending of money in a direction or by a method which runs counter to the line of policy pursued by his directors. It may be that the representations of the manager will carry the day, but he is often rather galled to find that what he regards as a golden opportunity for making money is heedlessly thrown away by his directors. Probably the branch manager has not sufficiently realised that in dealing with the advances of the bank as a whole, certain rules must be for safety's sake laid down, and more or less closely adhered to.

It is intended here to give some idea of the general principles which should guide a banker in lending money, though with this proviso, that circumstances may often arise which necessitate the breaking of the rules laid down. A banker, like most business men, is often constrained to act against his better judgment. He may be influenced in his loans by the fear of offending wealthy connections of his customer by a refusal, or, having made a loan without security, he may find it better to accept later on an unsatisfactory form of security rather than face a heavy risk of loss.

First of all then it will be convenient to consider the classes of borrowers with which a banker usually has to deal. These can be divided into three:

(1) Private individuals, i.e., those not engaged in trade or business.

(2) Commercial firms or individuals.

(3) Companies registered under the Companies Acts.

This is not a complete list, for it excludes such borrowers as municipal and educational authorities, but it includes all we have room to discuss here.

First then, in dealing with private individuals it should be noted that such people should not, as a general rule, offer bills for discount. Bills arise out of commercial transactions, and private individuals neither pay their debts nor are they paid by means of bills. Sometimes they may offer bank bills for discount, and this may be quite in accordance with expectation. The customer may have, for instance, property in one of the Colonies, and may have money remitted to him by means of sixty days' sight bank bills, which is the usual method of remitting money from Australia; in this case, the customer will often wish to discount the bill with his banker. Nevertheless, as a general rule, bills offered for discount by a private individual should be regarded with suspicion; they may probably turn out to be "accommodation" bills. An accommodation bill is one which an obliging friend or other person has accepted in order to enable the holder to borrow money upon it, but without being a party to any monetary transaction upon which the bill has been based. It is always doubtful whether an accommodation bill will be met at maturity. The obliging friend has probably been informed that the bill will be "taken up " or "retired" before maturity, and he has therefore taken no steps to meet the bill. Borrowers are however proverbially sanguine, and it often happens that the drawer or endorser of the bill is unable to take it up before maturity, and the bill is consequently dishonoured, in which case the banker may find that his only resource is to renew the bill, and hope that time will improve matters.

Secondly, in advancing money to a private individual, remember that however large his income may be, it may cease at his death. Supposing the customer is a barrister or doctor earning several thousands a year, but living right up to his income and saving no money. His banker may feel tempted to grant him a temporary loan without security, relying on the extent of his "turnover," that is, the amount of money passing through his account. But in case of the customer's death, what is the banker's position? If the customer has spent all his income and has no capital, the debt will be worthless. It is an error to suppose that because a man lives in good style and keeps up appearances, he is necessarily a wealthy man. Of course, a glance at the customer's account in the ledger will usually show whether he has money invested. If he has bought Stock Exchange securities, the dividends will be periodically credited. If, on the other hand, he has invested his money in landed or other property, it may not be easy to distinguish between the income from these sources and other receipts.

In lending money to the second class of customers, commercial men or firms, the banker has different considerations forced upon his notice. In dealing with such men, a banker is often asked to make temporary advances without security. A business man may often have sudden and unexpected calls for payment which he cannot easily meet, but which must not be disregarded. A commercial man's credit, his reputation as a man of means, is a tender thing, a part of his capital, and in order to protect it he may have to make a sudden call upon his banker.

Something can be told from the amount of a business man's "turnover," but this knowledge must be used with caution. He may be buying on long credit and selling for cash, or he may be speculating, and the appearance of his account be deceptive. Some banks ask their customer to give them in confidence a rough balance-sheet showing the state of his finances. It may be asked what is the use of a balance-sheet which only possesses the authority of the customer's written statement, and which the banker is unable to verify? It may be entirely fraudulent. The answer is, that it is almost impossible in this matter for a banker to protect himself against deliberate fraud on the part of a customer. Very few men would go so far as to sign a fraudulent balance-sheet, knowing that they would by so doing render themselves criminally liable. The risk of fraudulent dealing is an ordinary business risk which a banker is at times compelled to run. If the customer is such a one that his written statement cannot be trusted, it will be advisable not to lend to him except upon good security. But in considering a balance-sheet with a view to lending money, although the possibility of fraud can in most cases be disregarded, yet the banker, if he is wise, will make a liberal allowance for the exaggerated optimism which nearly always characterises a borrower, however honest he may be.