SMALL BUSINESS ACT THURSDAY, MAY 16, 1957 HOUSE OF REPRESENTATIVES, COMMITTEE ON BANKING AND CURRENCY, Washington, D. C. The committee met at 10 a. m., Hon. Brent Spence (chairman) presiding. Present: Chairman Spence (presiding), Messrs. Brown, Patman, Multer, Mrs. Griffiths, Messrs. Vanik, Coad, Talle, Kilburn, Widnall, Betts, Mumma, McVey, Hiestand, Bass, Seely-Brown, and Chamberlain. The CHAIRMAN. The committee will be in order. We will call Mr. Maxwell of the American Bankers Association, as the first witness. Mr. Maxwell, you may proceed as you please. You have a written statement. You may read it and then subject yourself to interrogation, when you are finished. Mr. MAXWELL. Thank you. The CHAIRMAN. Mr. Maxwell. STATEMENT OF ARTHUR F. MAXWELL, THE AMERICAN BANKERS ASSOCIATION Mr. MAXWELL. My name is Arthur F. Maxwell. I am president of the First National Bank of Biddeford, Maine, and a member of the Credit Policy Commission of the American Bankers Association. I am presenting this statement on behalf of the association in connection with various bills, amending the Small Business Act of 1953, which are being considered at this time by your committee. The American Bankers Association, the membership of which consists of 97 percent of all the banks in the country, naturally is interested in the problems of small business since a majority of the banks making up its membership are small business institutions and all of its member banks, both small and large, have many borrowing customers which are small business enterprises. To illustrate the small business character of banking, out of a total of approximately 13,700 commercial banks, around 8,900 banks, or 65 percent, have deposits of less than $5 million and about 11,000 banks, or 80 percent, have deposits of less than $10 million. These institutions and the larger banks as well serve daily the 4 million units of small business. They know the problems of small business; they know its strength and weaknesses, and they have respect for the rugged individualism of the typical small-business man and faith in his ability to get ahead. Since World War II, commercial bank lending practices such as term loads, accounts receivable financing, installment repayment equipment loans, field warehousing financing, and consumer installment financing have been particularly significant from the standpoint of small-business concerns. Term loans, by making credit available for a period of 1 to 5 years or longer, have enabled many small and medium-sized businesses to finance the purchase of facilities, equipment, and machinery with funds, the repayment of which is more closely related to the life of the asset acquired. Greater availability of accounts receivable credits, installment repayment equipment loans, and field warehouse financing, by broadening the categories of acceptable loan collateral, has provided a broader base for small businesses to obtain credit. The further spread of consumer installment financing and personal loans has provided some very small business concerns, the majority of which are unincorporated, with sources of short and intermediate-term credit. According to a survey of business loans of Federal Reserve member banks conducted by the Board of Governors of the Federal Reserve System in October 1955, the member banks had outstanding on October 5, 1955, credit to business totaling $31.6 billion. This total amount of business loans outstanding was 23 times as large as in 1946 and the number of loans was twice as large. The survey also showed that most individual business loans of member banks were to borrowers with relatively small total assets. Almost one-half of all business loans were to concerns with assets of less than $50,000 and 4 out of 5 were to concerns with assets of less than $250,000. Moreover, the survey disclosed that term loans accounted for 34 percent of a member bank business loans outstanding in October 1955, and further, that the relative importance of term borrowing by small enterprises had increased substantially since 1946. For those concerns with assets under $50,000, the ratio of term loans to total bank borrowing had risen from 29 to 41 percent. The findings of this survey indicate that banks and other private institutions have been meeting the credit requirements of small business. Such information as is currently available supports the conclusion that the proportion of bank loans to small business, both as to volume and type of loans, has not materially changed from that shown in the Federal Reserve Board survey. Furthermore, the number and amount of business loans approved by the Small Business Administration from its inception through December 31, 1956, are so small relative to the number and amount of bank loans to small businesses during this period that serious doubt is raised as to whether a sufficient demand for credit exists outside of the banking system to warrant the continuation of the business lending program of the Small Business Administration. There are more than 4 million small-business concerns in the United States: Consider the fact that according to its seventh annual report, the Small Business Administration from its inception through December 31, 1956, had received 13,025 loan applications, had approved 5,610 applications, and had initiated disbursement of only 3,606 loans. In other words, the SBA was making loans to nine one-hundredths of 1 percent of the small-business concerns in the Nation. A recent news release by the SMA Administrator shows gross total loans approved by SBA since the start of its lending program, September 22, 1953, through April 22, 1957, to be 5,896 business loans for $278,534,000. On the other hand, the 1955 Federal Reserve Board survey disclosed that member banks had more than 608,000 business loans outstanding to concerns with assets of less than $50,000 in a total amount of approximately $1.7 billion and more than 469,000 loans to concerns with assets between $50,000 and $250,000 in a total amount of approximately $4.5 billion, making a total of over 1 million loans aggregating over $6 billion to the business concerns in these 2 size categories. Comparison of these figures with those of SBA further illustrates the minor role this agency plays in our economy-a role which entails a substantial financial cost to the taxpayers and some economic cost to well-established and soundly operated small-business enterprises which may suffer from uneconomic competition of marginal operators who have been enabled to continue in business through SBA financing. On the matter of costs to the taxpayers, it would appear from SBÄ figures that the cost of processing each loan application has been approximately $784. This figure, of course, would be considerably higher on loans made. Not only is it costly for the SBA to "put a loan on the books," but the subsequent servicing, which may involve reviewing requests for resetting repayment schedules, extensions of maturities beyond the original terms and passing on secondary loan applications to bulwark the original loan, all add to the overall costs of the business-loan program. The cost of liquidation of defaulted loans and of curing delinquencies should not be overlooked. It is disclosed in the 7th semiannual report of the SBA that 78 loans are in liquidation status and 64 have payments due which are delinquent in excess of 60 days. It is indicated that, by reason of inadequate collateral, liquidation actions have thus far resulted in the charge-off of $70,224 of principal on three loans; but, should the economic cycle move downward, the charge-offs could become substantial. Attention is called to the 1952 report of Joint Committee on the Economic Report in the 2d session of the 82d Congress concerning the monetary policy and management of the public debt. The following quotation is an excerpt from a joint reply made by the presidents of the twelve Federal Reserve Banks in response to the Committee's inquiry as to the availability of capital for small business. It appears in part II, page 795, of the report. It is an opinion from a competent authority which merits careful evaluation. We believe that the establishment of additional governmental facilities on the national level to provide capital or credit, or guaranties, for small business would not be necessary or desirable. The establishment of additional agencies to provide capital or credit, or guaranties, for small business would, in fact, tend to be harmful in the long run to the American enterprise system and the public welfare for the following reasons. 1. Such agencies are unlikely to have the intimate knowledge of all aspects of the affairs of individual businesses that is needed to enable them to provide the type of service, supervision, guidance, and counsel appropriate to protecting the investment and providing management aid. 2. Those making the final decisions bear no risk and are not penalized for their errors of judgment. 3. There is danger of the infiltration of special influence and corrupt practices which tend to destroy fair and impartial administration. 4. A deliberately generous granting of Government financial aid would inevitably lead to the creation and financing of more new businesses than the economy could support, and thus produce increasingly uneconomic competition as well as increased failures among small businesses. Competition is the essence of the American system and it is also the dynamic force that betrays incompetent management and causes businesses to fail. Government subsidization of uneconomic enterprises would be damaging to sound enterprises while ultimately failing to assure the survival of the less competent. For these reasons we believe that additional direct Government financing of private enterprise should not be undertaken. If it should be concluded that there is sufficient evidence of a need for additional facilities for supplying capital to promising enterprises, the first approach should be to undertake to reduce or eliminate obstacles to private Sinancing. If anything further should appear to be needed, assistance by public or semipublic institutions to privately managed local or regional institutions organized to seek out sound opportunities for the employment of capital in small enterprises would be far preferable to direct Government financing. It may be of interest to mention at this point that since 1944, our association has had a special department called the Small Business Credit Commission, whose activities are devoted entirely to the interests of small business. The ABA Small Business Credit Commission, shortly after its inception sponsored the establishment of approximately 55 bank credit groups throughout the country to handle socalled marginal loans to small business. These groups were organized on a State or regional basis. The existence of the groups had the effect of stimulating the interest of banks generally in financial problems of small business and ways and means in which to meet them. It soon became apparent that the primary financial requirement of small business often was not a need for loans but rather a need for equity capital. This led to a new movement-the organization of corporations in a number of States to supply long-term financing to worthy business concerns. The bankers of my State took the lead in this movement. With the financial cooperation of the principal industries in the State, they organized the Development Credit Corporation of Maine in 1949. Since its inception, this corporation has been supplying long-term credit to worthy business concerns, and I am happy to say that I am president of this corporation. We are very proud of its service to the small-business fraternity. The movement has spread throughout New England and to New York and other parts of the country. A moderate amount of initial capital is supplied to these Development Credit Corporations by business and individuals, but the bulk of the funds used by them in making loans is provided by the banks. It is significant that these corporations are fully subject to taxation, including their income, and enjoy no tax exemptions such as that enjoyed by the SBA as a Government agency. The historic position of the American Bankers Association with respect to Government lending to private business is similar to the principles so well expressed in the Task Force Report of the Cominission on Organization of the Executive Branch of the Governinent, known as the Hoover Commission. I should like to quote from that report: Ever since the depression of the early 1930's we have made virtually a fetish of financial security for the individual, and by each successive governmental effort to enhance it, we have loaded more and more of the inherent financial risks of our economic life on the Federal Treasury. This was perhaps a natural and proper development to a considerable extent during World War II when a great industrial expansion was undertaken as the united effort of all of our people. However, it has continued since the war. Our risks have continued to grow, as they must with the growth in the volume of enterprise, but by our efforts to escape them as individuals or small groups, we have assembled more and more of them in the national public debt where we hope they will somehow cease to plague us, or cancel one another out, or in any event, await the coming of future generations for their settlement. Where the Government lends to fill such a credit gap as this, it is assisting unsuccessful competitors. The risks are the normal risks of conventional lending. But, in addition, the Government assumes responsibility for launching the projects which the borrowers could not launch through their own contacts in the private economy, and it does so without curing the defects which stood in the way. When loans are made to business enterprises under these circumstances, the borrowers and their business associates are assisted in their competition with others who do not have the backing of the Government. This raises in each case the question of whether the general public gains more benefit from helping the otherwise unfortunate loan applicant than it loses by hindering his otherwise more fortunate competitor. It is not possible for the Government to assist one competitor without placing handicaps in the path of another. The principal cause of business failures appears to be poor management and not lack of credit. Dun & Bradstreet, Inc., in classifying failures in 1955 listed incompetence as the underlying cause of 49.4 percent of all failures for that year, followed by unbalanced experience in 16.2 percent of the cases; lack of management experience in 15.3 percent; lack of experience in the industry in 10.4 percent. Thus 80 percent of the failures of business concerns in that year were due to incompetent or inexperienced management. We are not cognizant of any recent developments that would cause us to change our position taken before this committee in 1953 and again in 1955, that there was no demonstrable need for the creation of a Government agency such as the SBA in the first instance nor for its continuance. The banks and other private lending institutions of this country have demonstrated clearly their readiness and ability to supply the justifiable credit needs of business enterprises, small as well as large. The reports of the lending activity of the SBA indicate that the costs to the taxpayers of this activity are far out of proportion to the benefits received by the small number of businesses that borrow from the SBA. Other reasons why we believe that the lending function of this agency should not be continued are (1) that the funds to be employed are raised by taxation of all citizens and used for the benefit of a selected group; (2) such Government financing is conducive to making loans in many cases to poorly managed or marginal producers who, as a result, are kept alive in uneconomic competition with other well and soundly managed small-business concerns; and (3) the existence of such financing authority in a Government agency places the Government in a position of being able to dictate to whom credit is to be extended, for what amount, and for what purpose. Most of the other functions of the Small Business Administration could appropriately be transferred to the Department of Commerce where they could be carried out just as effectively and at less expense to the taxpayer. The Department of Commerce is already staffed in Washington and in the field with personnel qualified to carry out a program of this character. In fact, the Department has long spon |