Risks of Loans on Staple Commodities Banks should loan only on staple commodities which have a broad, steady demand, a stable price, and a well-organized mar ket. Otherwise very high margins must be required to provide against possible inability to liquidate the collateral to advantage. Any commodity traded in on the produce exchanges meets these requirements. The prices quoted on these exchanges are also very useful to the margin clerk, who may require additional margin in case the market for the collateral of a loan is falling. On default of the borrower to pay upon demand or to provide additional margin, the bank may sell the collateral at once through a broker or may carry it along for a better market. The usual margin is 20 per cent or higher, varying with the stability of price, the natural shrinkage and deterioration in storage, the ease of liquidation, etc.
Another risk is that of the warehouse; it may or may not adequately guard against loss by fire, moisture, too high or too low a temperature, etc. Warehouse receipts pledged as collateral should, therefore, be accompanied by insurance certificates or blanket policies. The produce exchanges approve certain eleva tors and warehouses as "regular" when they conform to certain specifications in construction, facilities, management, and finan cial responsibility, and warehouse receipts of these are "good delivery" on the exchange. The federal reserve bank approves certain warehouses of its district, the commodity paper secured by whose receipts is eligible to rediscount with it. In any case the loaning bank must pass upon the character of the warehouse whose receipts it is asked to accept.
Substitutions of Collateral on Merchandise Loans Merchandise loans are made wholly upon one commodity or upon security of varied form, and the borrower is allowed to make substitutions of collateral. For instance, Richard Roe and Com pany, having obtained a loan for $ioo,000 on 12o,000 bushels of Manitoba No. i wheat, would be allowed to withdraw 6o,000 bushels and substitute warehouse receipts or bills of lading cover ing 50,000 bushels of corn and 25,000 bushels of oats. The maker of a loan for $5o,000 secured by i,000 bales of middling cotton could withdraw 50o bales and substitute 35o bales of sea island cotton. A loan originally on tea, in the course of time, may have as security cases of wax, barrels of oil, and rolls of matting. Since acceptance of substitution is a gratuitous service, the bank prefers that there be not more than one substitution per day.
Partial payments are frequent in this class of loan. The bank might receive a request as follows: Enclosed find our check for $2,000 which kindly apply as part payment on our loan of $25,00o dated May zo, 1921, and hand bearer warehouse receipt No. of New York Dock Company for 30o half-chests
of tea in order that we may have 24o chests released. We will return said certificate to you in due course.
John Smith and Company.
While the requested warehouse receipt is in the possession of John Smith and Company, the bank is without security for part of the loan; and in such cases the bank either demands a certified check or a trust receipt pending the return of the certificate. Or, if the goods are to be shipped, the substitution ticket might read: From our loan of $23,000 dated May 20, 5925, please hand bearer house receipt No. issued by the New York Dock Company for chests of tea, for which we hand you our trust receipt.
John Smith and Company.
Loans on Bills of Lading The essential difference between warehouse receipts and bills of lading is that in the case of the former the goods are in storage and in the case of the latter they are in transit. The usages so far as bank loans are concerned are very similar. One peculiarity is that in the case of loans on railway bills of lading the bills are seldom accompanied by insurance certificates because the rail roads arc liable for all ordinary forms of loss, damage, or un reasonable delay, subject to such exemptions as are authorized by the common law, the United States statutes, and the bills themselves; in other words, the burden of insurance is shifted to the railroads. If the uninsured goods are lost or damaged in transit through some cause for which the carrier is exempted from responsibility, the security, as represented by the bill of lading, is impaired or totally lost; but the shipper of the goods or the borrower who owns the goods and pledged the bill of lading may be a responsible person against whom the debt can be col lected. If, however, both the shipper and the debtor are insolvent or financially irresponsible, the security fails.
Commonly when the bank gives the possession of the bill of lading to a party, it is provided with a trust receipt, by which said party agrees to hold the goods in trust for the bank's account. This receipt gives the bank a prior lien on the goods and makes the bank a preferred creditor, and the party violating the trust would be subject to criminal prosecution for misapplication of the funds. The bank is content to receive back the bill of lading, or the warehouse receipt for which it was exchanged when the goods were taken from car or vessel, or cash in settlement of the loan; any other use might be construed as a misapplication of funds.