Page 992 - Week 04 - Wednesday, 31 March 1993
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Apart from a very high level of fees - in fact, fees that are so high that they are hard to justify from any point of view - over the last several years banks have changed their procedures for extending credit. These days far fewer people qualify, or people qualify for far less amounts, than previously. This is regardless of the security they have to offer. This has the effect of constricting the flow of cash in the community to the extent that businesses are going broke waiting to be paid by all the people in other businesses who are being treated in exactly the same way by the banks.
Commonly, no matter how much collateral security they put up, businesses are given an overdraft limit of not more than two-thirds of what they really need. This is just a rort so that the extra money required is granted as a concession by the manager but at a penalty interest rate. Typically, 3 per cent above normal overdraft rates is being charged. This is only more money going into the pockets of the banks at the expense of the community and the businesses involved. Another appalling situation is when the banks quote journalists their prime rate. Nothing like the majority of their customers ever obtain this rate. It is virtually unheard of for businesses to obtain funds at the prime rate. Certainly, most small businesses pay several per cent higher. Then later, if they get into any cash flow constriction or trading difficulty, a so-called risk factor is added to the borrowing rate which applied to them before the so-called arbitrary risk was assigned to them.
Then we have the situation of fixed interest, fixed term mortgages. Lately there has been a disquieting number of incidents of banks terminating these contracts for no known reason, saying only, "You no longer meet our lending requirements", without giving any indication of what lending requirements are no longer met. Particularly in the situation of interest rates being much lower than in the recent past, the problems this causes can be dramatic. Despite the fact that the bank may have arbitrarily cancelled the agreement before the expiry of the agreed term, they hold the client over a barrel. They make the client pay this penalty before they will release the security, which is typically a mortgage, so that refinancing can occur. This often creates a need to borrow more than the collateral will support.
Let me give an example. Say that the bank lent two years ago at 13.5 per cent. If today's lending rate is 7 per cent, they will want the difference - 6.5 per cent on the total borrowed - for the rest of the contracted term. This is simply extortion. The net effect of this is that somebody who borrowed $120,000 had to repay $142,000 in order to get the collateral released. This is an actual example of a business in Canberra. These penalties often seem to have been arbitrarily imposed. There does not seem to be any logical reason for them. One other recent case involved a business proprietor who was told that the penalty in his case was $600,000. When he objected strongly, the bank said, "Sorry, we have made a mistake; it is $300,000". They dropped it to $300,000 on the spot when he brought the concern up, but they still forced him to pay that penalty.
Most people do not have the tens or hundreds of thousands of dollars available for up-front lawyers' fees to litigate to protect themselves from these unethical practices. It is an important point to note that there are many solicitors who will not take on a case unless the client pays money up front. One can understand that if they feel that the client is under some economic hardship they may feel that they will not be paid. However, what does this do for justice? What does
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