Some of the bills receivable frequently mature before the bank's own notes become due. Since the loaning bank wishes to maintain its usual margin in collateral security, both the loan and discount departments have forms by which they notify banks of early maturing paper and ask for substitutions. In case the bank has to return collateral before the substitutions are sent, the receivables are sent by registered mail, with the statement in the letter that they are forwarded for collection and remittance pending the receipt by the bank of other approved collateral in substitution for that returned. A follow-up system is used to make sure that the bank always sends the substitutions. Some correspondents voluntarily take the responsibility of watching the maturities of the pledged notes and remit new collateral in ample time for substitution, so that it never becomes necessary to notify them; but the majority of borrowing country banks are dilatory in this respect and their pledged paper must be carefully watched.
In 1919 the note-brokers in New York prevailed upon certain banking houses to quote a call loan rate on loans secured by pledged acceptances. This arrangement saves the note-brokers from the necessity of discounting their acceptances in an un favorable market, for they can borrow on the security of the pledged acceptances enough to carry them. The call loan rate on acceptances is lower than the rate the note-brokers would otherwise have to pay because of their very high quality. The establishment of this call loan rate is a step in the development of a broader discount market in the United States. If such loans are called, the acceptances can be sold in the discount market.
Handling Applications for Loans When an application for a line of credit is received, a ticket is prepared in the credit department and sent to a few departments of the bank in order that certain figures may be entered on it to assist in deciding whether or not a line should be granted, and if so, its amount. The ticket bears the name and address of the applicant, the date when the application was received, the amount applied for, and the capital, surplus, and undivided profits of the applicant bank. The ticket goes in turn to the dis count and loan departments and to the foreign division, and to the bookkeeper who has had the account of the applicant. The discount clerk enters the amount, if any, which is then owing that department, the amount of discounts to the applicant for the previous year, when and how long the applicant was last out of debt to the bank, whether or not interest is allowed on daily balances, the manner in which certain officers are authorized to negotiate loans for the applicant, when the last discount was made, when it matures, and the rate charged. The loan depart ment enters the amount, if any, now owing to that department, the last rate charged, the amount of loans the previous year, and when and how long the applicant was last out of its debt. The
foreign division states how much, if any, the bank owes it for bills purchased or for commercial credits. The bookkeeper enters the average balance for the past six months, the average balance for the same six months the previous year, and the present bal ance. The ticket is then returned to the credit department, and if complete, is approved by, say, two members of that department having authority; it is then ready for the bank officers. The credit folder is next examined to see how the information con tained therein reflects on the applicant and what arrangements had been made with this particular applicant bank in the past. If all the information on file regarding the financial condition, standing, etc., of the applicant bank, and also the standing, ability, and integrity of the management, are all right, if the ac count has been conducted satisfactorily, balances being propor tionate to the amount of the line asked, and if other conditions are favorable, the bank is probably willing to lend anyreasonable sum.
No matter from whom an application comes, whether a bank, a corporation, a partnership, or an individual, the same sort of ticket is prepared and practically the same factors are taken into consideration. In the case of a borrowing corpora tion, the bank will require a copy of that portion of its by-laws which relates to the negotiation of loans, the signing of notes, etc.; if the corporation's by-laws do not cover this subject, its board of directors is asked to adopt a resolution authorizing the negotiation of loans and to send to the lending bank a certified copy of it. Because of the equal responsibilities of partners for debts of a partnership, such authority is not required of a firm, but where a firm employs a person not a member of the firm and delegates to him power to do certain things for the partnership, a certified statement of his authority is required.
Ratio of Loans and Balances—Forms of Loans The customary ratio between loans and balances is 5 :1, that is, an average balance of $5,00o would entitle the applicant to loans up to $25,000; but in cases of exceptionally desirable cus tomers greater loans than are warranted by the 5:r ratio may be allowed. On the other hand, in cases of second-class applicants the loans would be kept down rigidly to the usual ratio to bal ances, and any applicant appearing unworthy of credit would be refused an advance of funds regardless of the size of the account. It is customary with some banks and corporations to establish a line of credit with the reserve city bank for a year and re-establish it yearly. Others do not arrange for a maximum amount of loans, but send their notes with collateral whenever they need funds, and rely on the bank to make the advance. Having given a line of credit, the bank ordinarily carries out its promises; but if later good reasons appear why the loan should not be made, the line is canceled.