The strong objection which all banks have to making advances by way of overdrafts is based on sound principles, which are not generally understood fully or appreciated. The principal reasons why this form of advance is not desirable are as follows:

(a) That it does not fix the customer's liability as indisputably as a note does;

(b) That it leaves the date of repayment uncertain and thereby tends to encourage laxity on the part of the borrower;

(c) That the maintenance of an active account in the current account ledger involves an actual out-of-pocket cost in the matter of stationery and clerical work, and it is important that the average free balance in such accounts should be sufficient to afford the bank a proper remuneration. Accounts in which the balance is frequently reduced to zero or converted into an overdraft are not of any direct value to a bank. It is further to be borne in mind that accounts which from time to time are overdrawn are a further expense, thru the waste of the time of the managers and ledger-keepers, whenever proper authorization has to be obtained for payment of a check creating or increasing an overdraft, as all such checks have to be referred to the manager.

(d) No customer has the right to issue an order upon a bank to pay money which he has not at his credit. The least he can say is that he wishes to borrow so much, for such a time, so that the manager may decide whether the money will be lent or not; otherwise an attempt is made to borrow the bank's money without its consent.

The practice of issuing a check without having any account is a criminal offense, and many business men are in favor of placing a check for which there are not sufficient funds in the same category. In some towns the banks make a practice of adding 10 or 15 cents to each check returned dishonored from the clearing house before charging it to the indorser's account. This charge has been found to have a deterrent effect on the practice, and has therefore met with the approval of the merchants.

An overdraft in a savings account is, of course, absurd and under no circumstances should be allowed.

Review

What margin tests should be applied to the security for call loans?

Why is it sometimes preferable to make advances against notes as collateral rather than to discount them?

What is the maximum term of credit to a farmer? Why?

What are the ordinary kinds of accommodation paper?

Why is an advance in the form of an overdraft undesirable?