July 25th 1998

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Where do governments fit into the new global economy?

by Ron Ramsdale

News Weekly, July 25, 1998

How the Commonwealth Development Bank helped build Australia

According to the currently fashionable view, in the short term governments are needed to deregulate their national economies but after that, they are to be consigned to the interchange bench and summoned only in emergencies.

Government involvement in the financial sector is a particular "no-no", with declamations of "funny money" and hyperinflation accompanying any proposal to give Australia's smaller producers access to funds at a more favourable rate than currently offered by the commercial lenders.

To point out that Germany's Kreditanstalt fur Wiederaufbau (Reconstruction Bank) has fulfilled this role for 50 years in the most inflation-conscious nation on earth is to invite the response that Australians and Germans are different!

But, as Ron Ramsdale* explains, an Australian version did exist - it was called the Commonwealth Development Bank and it helped hundreds of thousands of businesses across Australia.

  • *The late Ron Ramsdale, prior to his retirement, held the positions of State Manager, Western Australia and later Victoria, for the Commonwealth Development Bank of Australia.

Do we need to re-visit the recommendations of the Royal Commission appointed in 1935 to enquire into the Australian monetary and banking system and the Act of Parliament of 1959 establishing the Commonwealth Development Bank?

The Commission, inter alia, concluded that there was a distinct lack of facilities for fixed and long-term borrowing. This was of particular importance for rural borrowers. It was considered often difficult for a small farmer to obtain long-term credit on reasonable terms.

The man who was prepared to settle down on a small property, rear a family and by patient and diligent work gradually build up an equity in his own property, was a type of farmer who would strengthen the Australia rural system and should be encouraged.

In Australia, at the time leading up to the Royal Commission, it was not generally considered to be a function of the trading banks to lend long-term, although many of their overdraft advances against rural property did extend over lengthy periods and were, in effect, long-term loans. However, there was no fixed commitment as regards either the continuance of these advances or the rate of interest to be charged. Long-term lending in the past had been left to State Banks, Finance, Pastoral or Insurance Companies, or to private individuals.

The Royal Commission felt that there was a need in Australia's financial structure for a Mortgage Bank and in 1943 the Government acted on the Commission's recommendation and set up a Mortgage Bank Department of the Commonwealth Bank, designed to meet this need in the field of primary production. The new Department commenced business on September 27 of that year.

The Mortgage Bank Department lent only to persons engaged in primary production and against the security of rural land. Operations were conducted throughout the wide branch system of the Commonwealth Bank. The Department was able to make loans available at the lowest possible rate of interest, a fact which is of exceptional importance to primary producers. At the time, interest rates charged were 4% per annum for loans up to 20 years and 4.125% per annum for loans from 20 to 41 years. Interest was fixed for the full period of the loan.

Loans were made on first mortgage up to 70% of the Bank's valuation of the security, or £5000, whichever was the less. Principal was repayable with interest in equal half-yearly instalments throughout the period of the loan, with payment at expiry date of the balance, if any, then outstanding. A borrower had the option to repay any portion of the loan in an amount of not less than £10, and such repayment bore interest at the rate payable on the loan.

At the outset, the Department obtained the services of agricultural experts, who besides doing valuation work, made their knowledge and practical experience available to borrowers. Qualified young men from the universities and agricultural colleges were added to the staff from time to time. A valuation bureau was established for the purpose of maintaining a continuous investigation into rural land values in relation to productivity.

During the life of the Mortgage Bank Department, and because of its establishment, a high level of rural prosperity prevailed, and a considerable fall in the total of rural indebtedness occurred.

It was considered that the Mortgage Bank Department fulfilled the requirements it was designed to meet, and by reason of the advantageous terms it offered, provided a very beneficial competition. The small producer who obtained a mortgage loan from the Bank found a considerable part of his capital requirements on long and easy terms. He enjoyed a low and constant interest rate and was given security against the calling up of his loan or the possibility of having to make reductions at a time when he was least able to meet them.

Consequently, a borrower, given a reasonable run of seasons and prices, was enabled by hard work and perseverance, gradually to build up his equity and finally achieve the security of unencumbered ownership.


The Commonwealth Development Bank (CDB) was established under the Commonwealth Banks Act 1959 which also established the Reserve Bank and the Commonwealth Banking Corporation. In January 1960, the Commonwealth Development Bank took over the role of the Mortgage Bank and Industrial Finance Departments of what was then the former Commonwealth Bank.

The CDB was initially funded by a special capital injection of $1 million from the Federal Government. From that time onwards, its ongoing lending program was funded from retained profits, from term deposits raised from the public, and from the money market at favourable rates of interest obtainable because the bank was guaranteed by the Federal Government which had a AAA credit rating.

Under its charter, the CDB was required to provide loans to persons and business enterprises engaged in primary and secondary industry where, in the opinion of the Bank, such financial assistance resulted in an increase in productivity and was not otherwise available on suitable and reasonable terms.

Consequently, its role was to supplement other sources of finance and to follow a lending philosophy under which prospect of success, rather than value of security, was the primary consideration. As a supplementary lender, the CDB would not consider an approach until an applicant had first unsuccessfully discussed his requirements with, at least, his own trading banker.

As security was not the primary consideration in CDB's lending, the raw materials upon which the Bank worked were:

* The person - his integrity and his managerial capacity;

* His financial position - his assets, his liabilities (with their repayment implications) and his equity in his venture;

* His property - its inherent potential, its existing state of improvement and its past performance (if any); and

* His program - its technical feasibility, its productive potential and its economics.

In the assessment of lending proposals and in the absence of security being the prime consideration to a loan being approved, the CDB was staffed by highly experienced and competent lenders to assess the long-term viability of proposals.

To assist in this process, the staff included a range of specialists qualified in the areas of agricultural science, economics, management, accounting, and engineering. They spent much of their time in the field undertaking assessment and investigation work.

In determining the inherent prospects of a lending proposal, it was the practice of CDB to prepare budgets of estimated income and expenditure.

Frequently budgets were projected over a number of years, until the stage was reached where the full expected outcome of the development program was reflected in the projections of income and outgoings.

This budgeting process enabled the Bank to assess the ability of the applicant to repay his overall borrowings, including the proposed Development Bank loan.

In all cases, the term of the loan was based on the Bank's assessment of the ability of the applicant to repay without undue strain, with an appropriate principal repayment holiday being granted in particular circumstances.

Major impact

The CDB is no longer in existence, but during its first 30 years, it fulfilled a very meaningful role in the banking industry by helping almost 400,000 businesses.

In its formative years, the Development Bank was heavily involved financing individual farmers who took up holdings in the Ord River project, the Esperance Land Settlements Scheme in Western Australia, the Coleambally Irrigation Scheme in New South Wales, the Brigalow Scheme in Queensland and the Heytesbury Scheme in Victoria, to name a few.

In the opinion of the writer, the Commonwealth Development Bank played a most significant role during its lifetime in the development of rural and industrial undertakings and was the catalyst for the economic success of many individuals and entities who/which otherwise would have been denied the opportunity to have made a meaningful contribution to the Gross National Product and the nation's overall quality of life.

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