Are the Banks Refusing Farmer Loans?
A reply to Grant Dexter’s question by a Saskatchewan bank manager
THE question as to whether or not the banks are curtailing farm credit in Western Canada is at this time receiving a good deal of publicity. Some farmers have been heard from, and repeated references are made to the topic from platform and press. It must be admitted that so far the discussion has been overloaded with criticisms on the one side, and, apart from an occasional brief denial from general managers, very little has been said on the banks’ viewpoint. Too often the public mind is swayed by the thought that if little is said in rebuttal there is little to be said. There is also a possibility that, by the constant repetition of arguments on the one side to the exclusion of those on the other, the effect produced is almost that of organized propaganda. The executive heads of banks are busy men, and it may be accepted that they are concentrating all their energies on the efficient performance of their heavy tasks in this one of the mast unprofitable and trying periods in the economic history of the world. They consequently lack the time to discuss in public the many aspects of the problems associated with dispensing rural credit.
And what of the bank managers? Human nature is such that we are all prone to see what is hard in our own lives and what is easy in the lives of others. This blindness to the other man’s point of view Is innate in most of us, and it is only by a distinct effort that we force ourselves to gather all the facts and consider them in relation to the question at issue. The impression would seem to be fairly general that bank managers are in these times sitting on bulging coffers, consistently declining applications for credit regardless of the financial position of the applicant. It is true, we are assured, that our critics regard us as a class with friendliness and even with affection, and some of the sting is thought to be extracted from the criticism by blaming the present conditions on that, abstract bogey, the Head Office.
In fairness, let us look at the situation through the eyes of the manager. The average Western business man finds it hard to be cheerful under existing conditions. Farmers find it still harder. These men are not merely clients of the bank manager; they are often friends who have developed the habit of talking over their problems with their banker and looking to him for advice and encouragement. In many instances they have been compelled to ask for indefinite extensions of debts contracted last year. The banker has realized for some time that many of his regular farmer borrowers could not meet their bank obligations as promptly as in normal years, and, instead of insisting on what was humanly impossible, he has been doing his best to cheer them up, harassed as they are by bitter disappointments unrelieved by immediate signs of a quick return to adequate prices and a fair earning capacity. Consequently the farmer banker, on whose head is heaped much of this criticism regarding niggardly dispensing of rural credit, looks at his disproportionately heavy agricultural loans and is tempted in his weaker moments to exclaim, et tu, Brute!
The bank manager enjoys but cold comfort from the thought that the public lays the blame for the present situation, not at his door but at that of his head office. He is thus robbed of the satisfaction of feeling that he is playing an honorable part in helping to solve these problems. He is not a mere puppet that functions or fails to function as strings tied to him at head office are manipulated. He must, in fact, be allowed reasonably
wide powers of discretion or the bank’s business cannot function.
Let me say without equivocation, and speaking on behalf of a number of bankers of my acquaintance, that if a farmer applies to me for a loan which is within his power to repay he receives it now just as he did before. Let me say further, however, that few farmers should be applying for large bank loans in the period extending from October to this date. This is the period in which they should be cashing in on their year’s work and should be paying off old debts instead of contracting new ones. Furthermore, if a large application is submitted to the average banker, the customer is told frankly whether it carried his recommendation to head office or not. If the loan represents sound business he forwards it, and having committed himself thus far he feels bound to follow it up, for his reputation is at stake. There are doubtless some timid souls in our brotherhood, but taking bankers by and large, they rate quite highly as a body of aggressive men with their full share of courage and tenacity. Perhaps there are instances of applications for credit being declined where the reasons given are not well founded. These instances, we submit, are remarkably few.
There are almost 1,000 branch banks in the three middle Western provinces, or one bank to every 2,200 people. To say that these 1,000 branches have out on loan at this date to farmers and those directly depending on farmers a total of one hundred million dollars is a reasonable calculation. On the same basis, it is not unreasonable to estimate that debts to mortgage corporations, machine companies, stores, etc., total a further two hundred million dollars. If this premise is approximately accurate, the West is today carrying a grand total of debts amounting to three hundred million dollars, and that with a total population of only slightly in exceas of two million people—a per capita debt of about $150 for every man, woman and child. Perhaps this enormous flood of credit—and it is a steadily rising tide—has not filtered through to some remote districts or 1ms passed by a few deserving applicants, but, looked at from this angle, it would seem fairly obvious that few have been passed by, and many have received more than their position warrants. Furthermore, when allowances are made for curbing legislative restrictions such as The Exemptions Act, The Debt Adjustment Bureau, and similar measures raised in protection of the farmer, the banker surveys his own territory and wonders who that could legitimately expect credit have been overlooked.
Earning Capacity the Final Test
IS IT not tjme to trim sails? We know that the credit system of modern business exists oilly among civilized peoples and reaches its highest stage of development in the most advanced civilization. However, like many more of our modern inventions, it is a menace when out of control, and when improperly used quickly proves to be a sure source of commercial disaster. An excess of credit may be considered as so much virus or poison in the body commercial and when the point of absorption is passed, activity ceases and death ensues. Have we not received sufficient warning from our less fortunate cousins south of the line--6,968 bank failures in the past ten years with total deposits of $2,625,627,000? And the num-
ber of failures in 1930 is the largest in the ten-year period.
Mr. Dexter cites fifteen of what he calls typical cases supporting the charges against the banks for refusing to extend credit. I do not know the extent of Mr. Dexter’s knowledge of Western conditions, or his experience in the lending business. However, would he, on the basis of the information submitted in these instances, lend his own money to the applicants, not to speak of lending trust money? Would he not deem it advisable to delve into many details not covered in his series of paragraphs, fairly full though they are? He must know that the science of crediting is not so simple as to be conducted by rule of thumb. A successful banker grants credit with a liberality which ensures the loyalty of his customers and a conservatism which guards against loss. He must be a judge not only of what constitutes a good risk based upon assets or liabilities, but of human nature as well. The branch bank dependent on agriculture for its revenue must inevitably have an uncertain and stormy experience. The problems of the farmer are so varied, and at times so much beyond human foresight and control, thatit is difficult to forecast the future with any degree of certainty. These difficulties were never so acute as at the present time.
The facts cited by Mr. Dexter are all essential to the intelligent consideration of any credit, but the first question any sound banker will ask is whether he has before him all the facts. It may be stated without fear of intelligent contradiction that if one hundred average farmers are asked to submit, unaided, complete statements of their affairs, at least ninety of them will omit some detail required to complete the picture. This comment is not to be taken as a reflection on the honesty of the farmer. His assets and liabilities are often of a varied character and he has seldom the training or the inclination to keep a complete set of books. Of course there are some who keep records enabling them to submit at any date in the year a detailed and accurate balance sheet comparable with that furnished by a business man, but farmers themselves will be the first to grant that these men are the exception. In practice, the matter of taking a farmer’s statement is a fifty-fifty proposition. The farmer furnishes the outline but the correct balance is struck only after the banker has, by a series of leading questions, elicited a good deal of information that might have been overlooked.
Having got thus far, the question of fair valuations calls for careful consideration. On top of this the banker must ask himself several pertinent questions. Is the farmer applicant attentive to his obligations? Is he a hard worker, an intelligent manager and a husbandman whose efforts are timely and reasonably successful? For example, a farmer’s record, as displayed by a series of annual statements over a period of years, may indicate clearly that he is progressive and a consistent moneymaker; or it may show that, owing to some weakness in character or mentality, sour or sandy soil, weedy land, neglect of crop rotation, poor roads, distance from market or several other important factors, he is steadily losing ground.
And the final and unavoidable test must be the farmer’s earning capacity. Is he able to produce sufficient over and above expenses to repay those debts he has
already incurred; and at the same time, given even fair fortune, will he, on the basis of his estimated crop for the ensuing year, be able to take care of the loan for which he applies? Perhaps it may be thought that these details are too searching and microscopic. Again let me assert that no sane man would call for less before lending his own money, and only a plain ordinary fool would permit caution to slumber when lending another man’s money.
When times are hard the country banker has perhaps few positive achievements to his credit and his work may seem insignificant. It is so easy to lend money, and often so difficult to get it back even from the honest and well-intentioned borrower. The lender is always popular while he is lending, but few people have much love for the collector. The positive naturally appears more attractive than the negative, but surely the latter is the perspective in which bankers must be judged in times of stress. Business has got to be sick to understand the evils which the level-headed banker prevents, and to discover the benefits he creates. Most of us have sundial memories, recording only the sunny hours, and the bitter experiences of the past are all too soon forgotten.
But to return to Mr. Dexter’s fifteen cases: The first case cited is that of a farmer owning 4,500 acres of land purchased at $44,000, on which he has paid $15,000 and has contracted to pay a total of $29,000 in installments of $5,000 per annum. We are not told whether his last crop netted sufficient to enable him to meet the annual installment on his land. This man’s operating expenses must be heavy, and at present prices it is quite possible that he showed a loss on last year’s work. If he passes up his land payment this year he may make up the deficit next year. If, however, prices for his commodities should show little improvement in the ensuing year, and climatic conditions should prove unfavorable, his position at the end of the year will be perilous indeed. The vendor of his land may foreclose and, under the landlord and tenant clause in the agreement, repossess the land and seize and sell a considerable portion of his livestock holdings as well, thus leaving the farmer stripped of his land and much of his equipment; or he may take personal judgment for the overdue installment, working the same havoc in a different way.
Furthermore, if this farmer had purchased cattle last fall with the bank’s money, these animals would have cost him about six cents per pound landed on the farm. At date of writing these same animals are worth only four cents per pound, the drop in market price thus more than offsetting the gain in weight. Is it not, therefore, the part of wisdom for this farmer, with his burdensome load of debt against his land, to try rather to reduce his liabilities instead of adding to them? Moreover, in the light of past events, was it not fortunate that he was unable to borrow money for the purchase of cattle which in the circumstances, as we now know them, would have proved an unprofitable investment?
Freer Credit Not a Solution
IN THE second instance, the farmer applicant is the first to admit that he is a poor banking risk. We do not believe that Mr. Dexter seriously contemplates having the banks lend a man money when the applicant, who is generally hopeful on this point, admits that he can see but little possibility of being able to repay. The average banker already has a number of provoking reminders on his books in the way of long overdue accounts placed there by an oversanguine and trusting temperament. For the good of his institution and the country at large, it is to be hoped that he is not quite so sanguine as to accept this class of business. Surely this would be exceeding the recognized limits of prudent banking. Little time need be spent on credit applications of this character, which too often form a large part of the flood of destructive and carefree suggestions submerging the true issue. Criticisms of this kind turn no wheels and grind no corn.
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The third instance is illuminating. We are told that scores of farmers in one particular district have been accustomed to get advances from the banks of from $200 to $500 to carry them through the winter. On the face of this, it is fair to assume that these borrowers are men with small holdings and possessed of little in excess of their exemptions. The location is given as Southern Saskatchewan, which is one of the most unfortunate areas this year. Most of these men have gone through an unprofitable and disastrous year. Their holdings of livestock have been sacrificed to furnish the necessities of
life, and many of them have received relief from government bodies and Red Cross societies.
What could a bank manager tell these men except that nothing could be done for them by way of bank assistance? If they were told that the power to loan had been taken from the manager and vested in head office they were misinformed. In these cases the power to loan had no bearing. The power to borrow—the basis for credit—had been extinguished, not by any head office but by an unkind fate beyond the control of either farmers or banks. Perhaps in a moment of weakness or thoughtless irritation some managers have declined credit by making the bald statement that they are lending no money. Either they were too weak or too careless to say frankly that the dictation came not from head office but from their own reason, and to this extent some bankers may have strewn a few more thorns on the path that their confrères have to travel.
There we have an analysis of the first three sample cases in the order mentioned. To go through the whole list in detail would only prove wearisome. Suffice it to say, this attempt to present the other side of the picture is made in good faith and in all sincerity, in the hope that it may help toward a saner solution of the difficulties both bankers and farmers are
at present fighting manfully to overcome.
Most country bankers carry a heavier total of loans on their books today than at the same date one year ago. The general public is prone to forget that, although a bank’s resources may be large, its obligations are correspondingly heavy, and that it is under a legal as well as a moral obligation to meet promptly any calls made upon it by its depositors. No bank can achieve the impossible and advance credit before the wherewithal has been accumulated in the shape of deposits. It is on a question such as this that the banker’s judgment is tested when he has to strike a delicate balance between courage and caution. While the chartered banks have annually advanced huge sums for the development of rural districts of the West, there have unfortunately been cycles when repayment of these loans, particularly those for agricultural purposes, has not been forthcoming, and when, instead, more money had to be lent out on top of the assistance already granted, thus pyramiding their advances and piling up a heavier burden of obligations for the farmer to repay when the wheel of fortune revolves in his favor.
It will generally be admitted that the present period of agricultural depression, which it is hoped is now drawing to a
close, is one of the worst in the economic history of the West. There are always a certain number who are in favor of tearing things down if a millennium is not created immediately. The country is experiencing a period of financial and agricultural depression and, like an invalid, keeps turning over in the hope of feeling better on the other side. As usual in such crises, the remedy is sought in violent fundamental changes and the consumption of dangerous quack medicines blazoned abroad as likely to effect a quick cure. Should we not rather rely on the time-honored remedies—patience, natural recuoerative powers, rest, quietness and careful nursing? Most straightthinking farmers appreciate the way their bankers have stood by them in these times of stress, and they realize that freer credit cannot remove the difficulties under which they labor but will rather render their position more precarious and add to the burdens they already carry. They appreciate that too free credit has ruined more mercantile businesses and farmers’ undertakings than anything else. They are also alive to the fact that they can emerge from their present difficulties only by devoting greater thought to thrift and more economical and scientific management, not by loading themselves down with more credit.