Current loans form the largest individual item in the statement, and consequently represent the bulk of a bank's investment. This is an asset which requires the most careful and unremitting attention on the part of the branch manager and the head office.
Current loans can be broadly divided into advances to customers and bills and notes maturing. The latter are the more desirable because they are principally composed of trade bills, with a currency of from sixty to ninety days, and as a rule can be relied upon to be retired at maturity. A good portfolio of bills is no mean factor as a part of the reserve. Canadian banks as a rule refuse to take longer term paper than that of three or four months' currency; in fact the average currency of a good bill file should not exceed six weeks, which would mean a steady flow of money coming in every day, even if only 50 per cent of the items maturing were paid in full.1
Advances to customers, however, cannot be relied on to any such extent. They may be divided into four classes:
(a) Advances made to customers on the security of produce and other merchandise;
(b) Advances made to customers on stocks, bonds, notes and other collaterals;
(c) Advances made to customers on notes other than trade bills; and
1 An interesting calculation may be made in any office by rebating interest on the daily total of the maturing notes and bills in the diary. The total thus arrived at will show the amount that would have to be rebated supposing all the notes were paid on the day selected. Taking this total rebate, ascertain for how many days it would pay interest on the total amount of unmatured time items. The number of days represents the average currency of the bill file. The actual results in one branch varied between 41 and 45 days' currency.
(d) Advances made to customers on single name paper.
The first two call for very little comment, and, if well margined, form a desirable asset. The third class, altho secured by two or more names, is not so desirable from a banker's point of view, as it may comprise a certain amount of accommodation paper. Advances to customers by means of single name notes are less objectionable, providing the customer's statement shows a sufficient margin of quick assets to warrant the loan, and that there is a definite understanding between the bank and the customer as to the destination of the loan, and when and how the advance is to be paid. Occasionally this latter class of advance is made by means of overdraft. This, however, is a practice that should not be encouraged as it is objectionable for many reasons which will be given later.1
It is the two latter classes of notes which give the most anxiety and trouble to the banker. Unless great care is taken, the bank is apt to become a partner, as it were, in more or less undesirable undertakings. It is here we find the dead loans, safe enough no doubt so far as ultimate payment is concerned, but still not banking transactions.
Advances are made to business firms and others that are in their way more or less permanent, sometimes consciously so, sometimes made so by force of circumstances. How can payment of such loans be ob1 See Section 10, Chapter VII (Classification Of Loans. 1. Call Loans).
tained within a reasonable time? Or in case of failure what can the bank do with the wornout works or the old-fashioned mill? It finds itself a partner, frequently principal partner, in the business.
It is therefore most necessary for a bank to avoid advances of this nature. It should endeavor to keep its loans in as liquid a condition as possible, and in reasonable proportion to its deposits.
Leroy-Boileau, in his "Traite d'Economie Politique," says:
Banks obtain their resources generally from the most mobile part of a country's capital - from funds scarcely constituted, destined for an investment whose character has not been determined or for consumption slightly postponed In view of this origin of the larger part of banking resources, it follows that the capital lent by banks ought always to remain in the condition of circulating capital, easily convertible into money, and should not be transformed into fixed and inconvertible capital. Banks are instituted to make capital circulate, not to lock it up.