The process of discounting or of making a loan varies with different banks. In some banks no loans of large amounts are made until they are approved by the board of directors or a finance committee of their number. In some smaller banks large discretion is intrusted to the president or vice-president or even the cashier in making loans, but in the last analysis the board of directors is responsible for all loans. The care with which the directors manage this, the most important function of the commercial bank, will largely determine its success and reputation.
To illustrate the steps involved in making a loan, let us suppose that a merchant desiring a loan offers the bank for discount his own single-name note for $5,000 drawn at ninety days. This application, along with similar applications from other customers of the bank, is entered in an "offering book," with the name of the maker of the paper and that of the indorsers, if any, the due date, amount, and rate of discount. The application is referred to the credit department which reports upon the financial standing and credit of the applicant and the condition of his account. Many banks now require all borrowers to submit a "borrower's statement" on uniform blanks giving a detailed statement of their assets and liabilities. At the regular meeting of the board of directors or of the finance committee, which in the large city bank may be daily, these applications for loans are considered. The first thing to be considered is the condition of the bank's funds, its loan account and its reserve. National banks are forbidden to lend more than 10 per cent of their capital and surplus to any one borrower. While banks depend mainly upon deposits for loanable funds, they must maintain a certain cash reserve against these deposits at all times. Whenever the bank's reserve of lawful money falls below the prescribed minimum it may not make any new loans or discounts, except by discounting or buying sight bills of exchange. In most of the states similar limitations are imposed by law upon the loans and reserves of the state banks. If the bank has sufficient funds to supply all applicants and they are regarded as desirable by the board or committee, the applications for loans may be passed upon quickly. In some banks the objection of a single director to an applicant's request for a loan is sufficient to cause its rejection; in others the majority rule applies.
It sometimes happens that the applications for loans exceed the available loaning funds of the banks. How, then, does the bank choose its loans? Naturally, preference is given to the depositor who has a large and steady balance. His account is most profitable to the bank, so he should be shown a preference when he needs a loan. As between several such eustomers, the bank will accept the strongest offer, the one backed by the soundest security or credit. The application of a depositor, even though his account is comparatively small and unprofitable, will generally be preferred to that of an outsider. Sometimes when money is scarce and there is a strong demand from borrowers, the preference in loans will be shown to the applicant who is willing to pay the highest rate of interest, provided his security is ample.
After an application for a loan has been approved by the board or proper officer, the paper goes to the discount clerk and the depositor's account is credited with the amount of the note less the discount. The clerk keeps a "discount register" which contains a record of all notes discounted, the names of makers and indorsers, dates, amount of loan, interest rate, due date, etc. All discounted notes are recorded also in the "tickler," a book with its pages consecutively dated so that the notes can be entered under the date of maturity. It is essential that a note shall be presented for payment on the day it is due; otherwise the indorsers are released from their liability as indorsers. The notes are "timed," that is, the dale of maturity is calculated and noted on the face of the paper, and are then carefully filed in large bank-wallets arranged in the order of "due dates."
The method of collecting the notes when due depends upon the nature of the business. Most large city banks will have among their customers business houses or firms who borrow on bills receivable, in which case the notes will be payable in various cities throughout the country. The notes will be turned over to the collection clerk or corresponding clerk several days before maturity to be sent out to the bank's correspondents for collection. The practice is growing of making all discounted notes payable at some bank. The note teller usually attends to the collection of notes payable in the city. He sends out the maturing notes by messenger to the banks where the notes are made payable. The regular customer of the bank who has a note due on a certain day will make sure that his account is sufficient to cover it. Generally he draws his check for the amount due payable to the order of the bank and it is charged to his account. Sometimes customers have an understanding with the bank that their notes when presented for payment shall be paid in the same way as their checks. This practice is generally undesirable as it opens the door to possible forgery or alteration of the note.