THE ORIENTAL BANK.
THERE is nothing mysterious about the fall of the Oriental Bank, though it may prove a more important event than is generally supposed. To begin with, the misery spread by the disaster will in some circles be very wide. In spite of the warnings given by the Press, which for two or three years past have been unusually outspoken, and of the steady.fall in the Bank's shares, the Anglo-Indians, the Anglo-Ceylonese, and the planters of the Mauritius have been unable to rid themselves of a traditional belief in the Bank whichtwenty. five years ago occupied throughout Southern Asia a position akin to that of the Bank of England in Europe. It was the Bank, its support made the credit of the greatest firms, and its hostility was a danger even to those great native houses whose resources are so much more solid than those of the European traders. In India its promises were as good as those of the State, and in Ceylon better. Even now, when the Bank has fallen, the Government of the Island, to avoid widespread ruin among their subjects, has been com- pelled to guarantee its notes. When evil days came, there- fore, Its shareholders hoped against hope that new capital, or restricted business, or a turn in the markets, would revive the Bank, and dung to their shares with a tenacity for which they will now be compelled to pay a heavy price. Few, per- haps, will be totally ruined, for the Bank was not unlimited, and .the shares were not held in great blocks ; but still, to small investors the loss of, say, £35 per share in property and of .e25 per share in call to pay creditors, means the difference between lives that are comfortable and lives that are pinched. The ultimate result depends, of course, upon the sale of properties in Ceylon and the Mauritius, in which two millions sterling have been invested ; but those who know most of ' the • prospects of coffee, cinchona', and sugar, will have the least' hope that the " call " will be less than the legal liability, now £25. Hundreds, too, who were afraid of -bank shares, considered a deposit with- the Oriental Bank the least troublesome and most profitable form of investment they could find. They relied on the share- holders, if not the Bank, to keep them safe in the long run ; and to draw 5 per cent. for your money without the trouble even of asking for it, in regular half-yearly payments, was to men like the Anglo-Indians, who are never rich, and who fret under the low English rates of interest, an irresistible tempta- tion. The Bank had swarms of such depositors, and though they may all get their money in the end, they will have months
of anxiety to endure ; and may, should the "properties " not sell well, find that Consols would have paid them a much larger return. ' •
For, as we have said, the causeof the failure of the Bank is not a mystery. The Times speaks of an unsuccessful specu- lation in Chilian Bonds, and of another in silver, based upon the idea that "bi-metallism would ultimately prevail ; but though we.may wonder at transactions so foolish, we do not understand that these losses were irremediable, or indeed exceeded the Bank's accumulated Reserve. The Bank has fallen through the temptation which besets every Joint-Stock Bank, and is especially attractive to Banks doing business principally in Asia—the temptation to earn large dividends easily by lending borrowed money on dangerous securities. A Bank with its head office in London and its business in Asia almost invariably runs through a certain foreordained course. It begins with an exchange business, which, if its managers know their work, is quite safe, fairly profitable, and exceed., ingly monotonous,—the sort of business out of which a private banker, with a quarter of a million of his own and half a million of deposits, might easily extract a safe 15 per cent. It next, as deposits flow in, lends' money, like an English Bank, on securities usually good, but, whether good or bad, certainly realisable after a fixed date. This also is profitable, for the risk is small and much distributed; and while the _money is borrowed at the comparatively low English rates, it is lent at the comparatively high rates which constantly or intermittently prevail in Asia. A few-days ago, for example, the Bank of Bengal was charging 11 per cent:for discounts, and of course if it could do this with money borrowed at 5 per cent.—which is not the system of that par- ticular Bank—the temporary profit would be large. By- and-bye, however, the Bank managers find that deposits are still rolling in, that they cannot lower their rate of interest, that the exchange business is " spoiled " by competition and the use of the electric telegraph, that the discount business offering is not sufficient, and that a new outlet for the employment of their money must be dis- covered; too much borrowed capital otherwise lying idle' at 5 per cent. Then they turn to investment in the most attractive, and, for a Bank, the most dangerous of all possible securities—the " estates " owned by Europeans in India or the tropical Colonies. The owners of these "estates " are always wanting money. They are, for the work to be done, the most impecunious class in the world, and for a very obvious reason. When a planter has made money, he goes " home " to spend it, leaving his successor, be it partner, agent, or assignee, to meet all requirements for wages, new machinery, and cultiva- tion the best way he can, that is, in fact, by borrowing. The new "estate " owners, therefore, apply to the Banks ; they offer high interest, often 16 per cent. ; and they pledge securi- ties which, on paper, look quite perfect. There is the "estate," valued according to its price in a good year; there are the crops ; and there is the produce from those crops,—coffee, quinine, sugar, rum, or what not. What could be better t To borrow money at 5 per cent., and lend it to men on the " mortgage " of such " estates," say, at 12 per cent., must, as it seems to Englishmen, be profitable business. So it is in good years, though it is bad banking ; but bad years come, and then the bankers find that their shareholders have divided past banking profits, that their debtors have spent their own past profits from sales of produce, and that the securities in their hands -are not "estates " at all in the English sense, but unprofitable businesses, which it is ruinous to atop, because nobody will just then buy the factories, and most dangerous, in the teeth probably of falling prices, to carry on by further advances. Still, they do carry them on. A private banker may make a heavy loss, and if not ruined grin and bear it, for nobody knows his blunders ; but Joint-Stock Bank Directors have to explain losses, to endure cross-examination, to listen to insults, and their moral nerve fails. If they told the truth they would have to resign, as confessed failures ; and they will not do it. They " carry " the -planters, that is, they turn planters on a huge scale themselves ; and is plant- ing is a business almost dependent for .success upon- the personal ability of the planter to govern great crowds of labourers, artisans, and overseers, all intent on doing as little as possible, they usually lose money. The depression continues, the losses become visible to all men with eyes, and , then the bankers become exposed to a double danger, They are losing heavily for a time on their " estates ;" and the in- flow of cheap money from depositors, which is their only advantage over other planters, and their only chance of tiding over the dangerous time, stops. "Notices of withdrawal " rain in, and though the contracts provide for a year's delay, the money might as well be withdrawn at once. It has not been lent out upon six months' bills, but on trading concerns from which it might take ten years, and is sure to take three- years, to escape without loss. There is nothini for it, even if there are gleams of light ahead, but to stop.; for otherwise, while the frightened depositors who _ are injuring the Bank will be paid in fall, the unfrightened depositors who are supporting the Bank to the end will have to bear the whole loss. The Bank Stops, and there is misery in thousands of quiet households, whose heads can urge at least one plea on their own behalf,—they were not moved to invest in the Bank shares by any unconscionable greed. Nothing in the history of Oriental banking is .so strange as the moderation of the profits with which investors are content. So long as the dividend is not below five per cent. on the pur- ohase-money, they will accept what is for many of them unlimited risk—that is, a risk of being called upon for all their savings —without even a passing apprehension,
There is, so far as we know,' no remedy whatever except for shareholders to forbid absolutely the lending of money upon any security not realisable within the year ; and that. limits " business " excessively. It involves, to use English law terms, peremptory foreclosure whenever the planter cannot pay his debt out of one year's crop ; and planters, of course, shrink from Banks which enforce such a rule. It is, however, if we are not misinformed, a nearly inflexible rule with the French Colonial Banks, which are semi-State affairs, and is the cause of the steady prosperity of those institutions. It is, at all events, the one rule compatible with permanent safety in that kind of business. No method of management will -make banking agents abroad willing to acknowledge and write- off great losses ; and no care will prevent loans on estates in the tropics from involving the liability to work those estates, which is not what Banks are made for. The " estates " are, in fact, businesses, and risky businesses ; and the Bank which lends money on them is sure, sooner or later, to find itself with a gigantic planting business on its hands, far too big to manage properly, and taken up just when falling prices have compelled the planters to give up the hope of profit, and allow foreclosure.
Previous page
