LOANS AND DISCOUNTS 1. Duration of loans.—Shall a bank make loans for long periods of time or for short periods? This de pends upon the kind of liability the bank is assuming against its loans—whether it is giving demand de posits or time deposits or cash in exchange for them. A trust company or savings bank which has long-time deposits can grant loans for relatively longer periods. Most of the loans of a commercial bank must be made for periods of not more than from thirty to ninety days.
It is also important that a bank should arrange its loans so that the maturity dates may rotate evenly, or in such a way as the business of the bank may dictate. It is important for an ordinary bank to have a certain proportion of its loans constantly coming due. When a bank does a seasonal business, as is the case with summer resort banks, its loans should mature when the heaviest demands come from its depositors. Such a bank usually finds it advisable to invest part of its funds in securities which can readily be sold at the right time. Sometimes a bank will find it necessary to borrow from another bank, perhaps in a different community. It will tender to the lending bank cer tain of its securities as collateral. Often the logical thing would be to sell the promissory notes which it has discounted for its customers. This practice is called rediscounting.
2. Time loans, as their name implies, are loans that have a definite maturity date. They make up the bulk of the loans of almost any bank. The bank usually wants some kind of security, for no matter how well the officers may know the borrower they do not feel justified in subjecting the bank to any more risk than is necessary. Stock and bonds, real estate mortgages—where the law permits—warehouse receipts and various other kinds of collateral may be presented. The nature of collateral and the kinds which a bank may safely accept are important sub jects in the study of banking. Sometimes the bank takes no collateral at all but relies upon the honesty and business ability of the borrower.
3. Demand loans are usually made at rates nearly equal to those on time loans and they are made on similar collateral. There is a
mutual understanding between borrower and lender that demand for payment of the note will not be made until some time which is convenient to the borrower. This kind of loan often runs for six months or a year or even longer. It is made to accommodate borrowers who wish to undertake some enterprise but who can not determine in advance just when the transaction will be consummated so that payment can be made.
Demand loans should not form too large a per centage of a bank's portfolio, for they are compara tively non-liquid. Payment of part, if not all, of the loan should be demanded at fairly regular intervals. If this is not done, there is danger that the loan will be used by the borrower as permanent instead of working capital.
4. Call loans.—Call loans are so named because the bank reserves the right to call for payment of the loan at its pleasure. They are confined almost entirely to traders on the stock and produce exchanges in Wall Street and in other financial centers. The bor rower reserves the right to pay the loan whenever he wishes.
The bank cares very little what broker has the loan so long as the security is adequate. Other things be ing equal, however, the bank prefers to lend to those who have no claim upon it and upon whom it can call for repayment without apology. There are a few brokers who keep in touch with the banks and know just where, and how much call money can be obtained and at what rate. As soon as the clearing house re sults are reported the officers of the bank know whether or not they have any surplus cash for loan on call. If they have, they communicate with the brok ers who make a practice of loaning on the floor of the exchange. These brokers offer the money to brokers who need it and inform the bank of the names of those who have borrowed. The method just outlined is the one, followed in Wall Street. It is used with some modifications in the other markets where call loans are made.