ISSUES WITH BALLS
ASHLEY BALLS DELIVERS A DOMESTIC TALE THIS MONTH ABOUT BANKING AND WHAT HE CALLS ITS “INFLEXIBLE ‘TICK THE BOX’ MENTALITY".
ONCE UPON A time… no, this is no fairy tale. It’s a real account of a how an Auckland-based SME was dealt with during a business loan application.
The business owner is in his mid30s, with three year’s history and no debt. Better yet, he has never had any debt. It is a hospitality business and the owner an awardwinning chef.
Current profit (for the year 31 March 2018) is over 40 percent of turnover and both gross margin and sales are well up on the previous year’s turnover by doubledigit growth.
As a direct result of growth, a solid three-plus year history, and numerous reviews in both specialist and national media, an opportunity to secure new (larger) premises occurred and business plans drawn up.
By using its own capital and cashflow the business was able to create a plan that required a modest $100K facility – representing a few months profit only. They took all the details to their bank and this is where the fun started.
The business has banked with the same bank since starting off, but was greeted with forms only; no meeting with a loan officer. Initially the application was turned down as the 2018 accounts were not attached. This was speedily remedied and, just as quickly, the loan application rejected – with conditions.
Could they offer a guarantor? Yes, a guarantor was available for the full $100K, held in cash by a rival bank. The guarantor was rejected as he (me, actually) is not New Zealand resident.
Quite why this is an issue is hard to see, as it is money that’s being guaranteed, and once the documents are completed the lender has first call on the cash in the event of a loan default.
I wrote to the loan officer direct, pointing out that there is no legal impediment to being a foreign resident guarantor and received the most ridiculous piece of business correspondence I’ve received in years. It implied there was a legal impediment (I have since taken advice that confirms my view) but it went on to say I did not fit their lending criteria, but… The upshot was they would offer a loan on the following terms:
That I make a term deposit with the bank direct – but place it in the name of the borrower (there may be a potential breach of the AntiMoney Laundering legislation here).
The amount required is for the full loan: $100K.
I wrote back pointing out a few basic truths:
Were I to lock up $100K in cash at two-point-something percent they would then on-lend this money at five percent to 19 percent, depending on whether it is used for mortgages, car loans or credit cards.
Moreover, when anyone places money on deposit the bank retains about four percent as cash and onlends the balance, and each time retains about four percent in cash. The result is that a single deposit of $100K creates for the bank various lines of credit amounting to somewhere over $1.5 million. The annual interest payable to the bank on that sum would exceed the loan officer’s salary – by a reasonable margin.
The depositor gets around $3000 (taxable) and the bank makes over $60,000 in a year.
The bank has no risk, no skin in the game, just massive reward.
Result? I have lent the business owner $100K and will charge him the same interest that I would receive on call.
Also, the bank has lost a client and stands to lose many more as news spreads.
As a business owner I understand risk and know that banks seek to have cast-iron guarantees on loans. But when they start to engage in inflexible ‘tick the box’ stupidity they deserve all the opprobrium they get. We were not looking for charity but the nonsense that occurred confirms that this bank (one of the big four) knows nothing of risk and was not even prepared to meet their pre-existing client, nor bother to check with their inhouse legal department whether a foreign resident guarantor was acceptable. In short it was amateur night. I’m certain others will have encountered this kind of ‘tick-thebox’ behaviour from their own bank – it is nothing new, just yet another illustration as to why the public holds bankers in such low regard. On a larger scale it is even worse as banks no longer create credit just from their ‘cash ratios’ but create bucketloads of credit at the ‘click’ of a mouse. That is, they create credit out of thin air and then charge the customer hefty rates of interest.
As an aside, here in the EU banks are happy to lend across borders and the location of the guarantor is of no concern. English banks will advance mortgage finance on properties across Europe and individuals take out car loans which are portable across Europe.
Little wonder that the Australian Royal Commission on Banking is taking these profiteers to the cleaners.