Journal Issue

Unused Bank Overdrafts: Their Implications for Monetary Analysis and Policy

International Monetary Fund. Research Dept.
Published Date:
January 1968
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A FEATURE of commercial banking operations is the existence of unused credit arising from the excess of commitments to lend by banks over actual advances, i.e., of credit facilities available for use but unutilized at a point of time or over a period. This situation can arise in all types of banking systems whether operating on the basis of overdrafts or on the basis of term loans. But unused credit is peculiarly characteristic of overdrafts which by their very nature and mechanics give rise more often, and for longer periods, to unused credit positions than does the term or fixed loan system. Therefore, unused overdrafts may be regarded as a leading species of the genus of unused bank credit.

Although the existence of unused overdrafts in the banking system has been often noted in economic literature,1 it is interesting to observe that unused overdrafts figured more prominently in the monetary discussions of the 1920’s and the 1930’s than in subsequent decades. Thus the Macmillan Committee and the Irish Banking Inquiry discussed them explicitly, whereas there is a virtual absence of references to them in the Radcliffe Report.2 Likewise, this aspect of commercial banking does not seem to have attracted much attention from practical bankers. Most current definitions of money supply also exclude unused overdrafts, and a large number of countries where the overdraft system prevails do not even publish separate statistics on them. An analysis of overdrafts was contained in an earlier study in the Fund by Mr. William H. White.3 Thus study, which was conducted in 1956, had to confine itself largely to theoretical discussion since statistical information on overdraft facilities and the unused portion of overdrafts was fairly scant at that time. Meanwhile, data have become available for a number of countries, so that an empirical evaluation can be attempted. But subsequent to Mr. White’s study there has been no systematic analysis of unused bank overdrafts on a comparative basis for different countries and their implications for monetary analysis and policy.4 The neglect of unused overdrafts by economists and bankers alike may even suggest that the phenomenon has perhaps no material bearing on banking operations and credit policies. But it would be misleading to draw any definitive inferences regarding the economic implications of unused overdrafts without a careful analysis of their nature, magnitude, and causes.

The existence of unused overdrafts poses several interesting and interrelated questions. First, it is essential to know how important, in quantitative terms, are unused overdrafts and what is the ratio of unused overdrafts to sanctioned overdraft limits. Also, are there any noteworthy features of the pattern and distribution of unused overdrafts? Second, what are the causal factors accounting for the emergence of unused overdrafts? Third, are unused overdraft limits as important for monetary analysis and policy as suggested by their size or are they largely economically fictitious? Do they impair the effectiveness of monetary policy, raise the cost of credit, and distort the allocation of loanable funds between individuals and different sectors of the economy? Last, is the exclusion of unused overdrafts from the conventional definition of money supply justifiable?

The present paper, which has been prompted by the use of overdraft facilities in a majority of the Asian countries, attempts to provide part of the answers to these questions by an analysis of unused overdrafts in the light of data that could be compiled for only a small group of countries comprising Australia, New Zealand, the Philippines, Sweden, and Norway. Although this group includes only one Asian country, it has still the merit of covering a fairly varied range of economic structures and banking systems. The phenomenon of unused overdrafts is obviously widespread, even if its magnitude may not be known, since it can arise in all banking systems where the overdraft or cash credit functions as the principal or an important form of credit, as, for instance, in the United Kingdom and in the Commonwealth (except Canada), South Africa, Ireland, Europe (e.g., Finland, Italy, the Netherlands), the Middle East (e.g., Libya, Jordan). Unfortunately, the lack or nonavailability of relevant statistics for most countries precludes a more extensive and detailed comparative study. But the available empirical evidence for Australia, New Zealand, the Philippines, Sweden, and Norway, even if somewhat fragmentary, does point to the existence of a sizable volume of unused overdrafts and permits some meaningful generalization about them.

This paper discusses the concept and mechanics of unused overdrafts (Section I) and then proceeds to present and analyze the empirical evidence relating to their size, fluctuations, and distribution (Section II and Appendices). Section II is followed by an analysis of the possible causal factors accounting for the emergence of unused overdrafts (Section III), their implications for monetary policy (Section IV), and their treatment in monetary statistics (Section V).

Broadly, the statistical data show that (1) the average magnitude of unused credit as measured by the ratio of unused overdrafts to outstanding credit limits is considerable, in the range of 30 per cent to 44 per cent, except in Sweden (nearly 14 per cent); (2) there is no consistent relationship between movements in the total sanctioned limits and the ratios of unused overdrafts, except in Sweden where they tend to move in the same direction; (3) seasonality is the dominant factor in the variations of ratios of unused overdrafts in countries where the data are adequate for an analysis of the components of change (Sweden and New Zealand); and (4) the urban sector accounts for a larger share of unused overdrafts in both Australia and New Zealand (the only countries that publish primary data on the sectoral distribution of unused overdrafts) than the rural sector.

Analysis of unused overdraft limits shows that a considerable portion of these are perhaps economically fictitious and therefore without any real bearing on credit policy or on the structure and level of interest rates or the optimum allocation of loanable funds among individual customers or sectors. However, the mechanics of overdrafts may complicate the implementation of an effective credit policy without really impairing it. The inclusion of unused overdrafts in the concept of money supply also does not seem to improve materially the explanatory value of monetary statistics, such as those of velocity of circulation. But it would be useful to have separate statistics on the size and pattern of unused overdrafts for policy purposes, and these may even have a limited predictive value in monetary models. The study also points to the need for further empirical testing of different aspects of unused overdrafts in each banking system in the light of its environmental peculiarities.

I. The Concept and Mechanics of Unused Overdrafts

Unused credit arises whenever a bank or any financial intermediary sanctions credit limits to a customer who may, for a variety of reasons, be unable to utilize these limits fully at a point of time or over a period. The problem of unused credit is therefore not peculiar to short-term commercial banking. It has in fact been widely observed in long-term lending institutions, too, such as development banks.5 There is, however, an important difference between unused short-term credit and unused long-term capital. Unused long-term funds are more often a temporary phase reflecting administrative and other lags in the processing, sanction, and utilization of loans. In short-term banking funds, the time lags, if any, in processing credit applications are minimal and inconsequential and, therefore, the persistence of unused credit over long periods would be more than a manifestation of institutional lags.

It is, however, important to stress that the overdraft system is not a unique cause of unused credit, since the excess of credit commitments over credit advanced can arise in other types of bank credit, like term loans. For instance, unused credit lines are not uncommon in term lending by commercial banks in the United States where the borrower pays a commitment fee on the amount not used within a certain period of time. Similarly, in Canada, where bank credit is extended largely through term loans, there is a considerable volume of unutilized limits of term loans with the chartered banks.6 Since this paper is limited to a study of unused overdrafts with commercial banks, a brief description of the mechanics of overdrafts is helpful in understanding why unused credit positions are more likely to occur under this system than, say, under term loans, which are the predominant form of bank credit in North America7 and many other parts of the world.

The overdraft system typically operates as follows: “In return for an undertaking … often reinforced by the handing over to the bank of some negotiable security of which the bank may dispose if the customer fails to meet his obligations, the bank allows the customer to overdraw his account … beyond the amount previously standing to his credit in the bank’s books, up to the limit set in the overdraft arrangement. (This limit will be fixed after the banker has considered the customer’s needs and prospects of profit.) This overdraft facility is equivalent to a bank deposit in representing part of the supply of money with which individuals can buy goods and services, and it becomes part of the visible supply of money as the right to overdraw is exercised and other people (recipients of the borrower’s cheques) acquire claims against the lending bank.”8 Thus, the essential part of the overdraft or cash credit9 agreement is the entitlement to borrow up to a specified limit. But the actual utilization of this limit is at the discretion of the borrower, who is under no financial pressure to draw up to the full limit, since interest is charged only on the actual drawing as reflected in the daily debit balance and is not related to the sanctioned limit. Consequently, actual drawings may be below sanctioned limits under the overdraft or cash credit system. But under the term or fixed loan system there is, by definition, no scope—at least from the standpoint of the lending banker—for unutilized credit, as the customer is entitled to borrow the whole of a fixed amount, which is immediately debited to his loan account and credited to his current account with interest being charged on the whole of the sanctioned loan. Therefore, the customer is more likely to utilize the loan with the minimum time lag after sanction.

The difference between the overdraft and the fixed loan is also reflected in their respective impact on a bank’s balance sheet. Under the overdraft system, it is only the actual drawing which appears as an asset in the bank’s balance sheet; the unused overdraft does not figure at all in the balance sheet. In contrast, the full agreed amount of the fixed or term loan is reflected simultaneously in the bank’s balance sheet as an asset under “Loans and Advances” and as a liability under “Deposits.” Consequently, the overdraft system does not fully reflect the extent of private claims on the banking system insofar as portions of overdraft limits are unutilized. This means that the balance sheet items of a banking system based on term loans would be larger than under the overdraft system, and more so if, as in the United States, borrowers are required to maintain a minimum compensatory balance on checking accounts during the life of the loan or of the line of credit.10

The overdraft system has obvious advantages of convenience, informality, and flexibility to the customer, since the drawings up to the approved limit can be varied without fresh approval as long as the limit is not exceeded. It is, therefore, particularly suitable when borrowings are for irregular amounts and uncertain periods. On the other hand, it appears to pose problems for the lending banker. For instance, one view is as follows: “As far as credit accounts are concerned there may be a fairly clear pattern established over the years which can be adjusted to give effect to recurrent seasonal trends. It is much more difficult to establish any clear workable pattern for anticipating withdrawals under overdraft facilities. The trend towards borrowing on overdraft rather than on loan account, while of the greatest convenience to customers, involves for the banker increased difficulty in the task of day-to-day cash control; and the extent to which it can call for increased safety margins will eat into the banker’s possible earnings.”11

Although the details of overdraft contracts may show considerable variations, the main features of the system are broadly similar in most countries. For purposes of the present analysis, however, it is more important to identify the types of overdraft arrangements that create possibilities of unused limits.

There are certain kinds of overdrafts which, by definition, do not give rise to unused limits, since the customer overdraws without a formal approved limit or else in excess of it. As there are no formal limits in these cases, all changes are in actual advances. Such situations, wherein drawings are in excess of limits, are not uncommon12 and may be said to exemplify the “lead” aspect of the overdraft mechanism.

But most overdraft arrangements that have formal limits create possibilities of a “lag” of drawings behind limits, as in the following instances.13

(1) The customer may secure a limit subject to repayment (usually in conjunction with a corresponding reduction in the limit) in regular installments. The lag of drawings is, on average, fairly short and stable, and often the full amount of the limit is drawn with little or no lag. The limit, however, vanishes with repayments, which makes this type of overdraft most like the fixed loan.

(2) The customer may obtain an overdraft limit that may remain virtually unchanged from year to year. This type of overdraft is commonly used by those with seasonal credit requirements, such as primary producers, and also by importers and others to finance fluctuating inventories. Limits of this type would rise only with the growth in number of customers and/or in the size of their average limits.

(3) The customer may obtain a new increased limit to meet a specific item of planned outlay. As the decision to go ahead with the expenditure depends on the limits sanctioned, the drawings will, therefore, usually lag behind approvals. But the limit is not necessarily reduced along with repayments. On the other hand, substantial fresh drawings are not made without renewed approval by the bank, which means that reductions will tend to be closely related to repayments. Generally the lag between limits and drawings under this type of overdraft depends on the interval between (a) the sanction of the limit and the placing of the order by the customer with his supplier and (b) the placing of the order and the presentation of the bill for payment by the supplier, at which point the actual drawing is made.

(4) The customer may secure an overdraft limit more as an insurance against future credit squeezes than with any firm or immediate intention of drawing against it. In this instance, too, there will be a considerable lag between limits and drawings.

There are also other types of overdrafts that generate positions of unused credit but not because of any lag of drawings. These are used as a base for raising further credit, and there are therefore no actual drawings. Such overdraft limits may be sought solely as security against trade credit with the knowledge of the banks concerned, or else existing unused limits may be used as backing for borrowing short-term funds from companies at a rate of interest below the bank overdraft rate. These arrangements in effect amount to transforming overdrafts from a source of credit to the status of collateral.

The above classification shows that, although the variations in the details of overdrafts can complicate relationships between formal limits and actual advances, their relevant feature for the present analysis is the fact that most of them are potential sources of unused credit through varying degrees of lag between limits and drawings.

Unused limits under the overdraft system are usually subject to commitment fees, which are related either to the limit of the facility or to the outstanding amounts at specified dates. But the detailed schedule of fees or charges varies considerably from country to country.14 The effective cost of credit under the overdraft system is measured by the sum of (1) interest on the used overdraft, (2) commitment fees on the unused limit, and (3) service charges to cover the costs of operating the overdraft account. Since commitment fees are usually a small fraction of the rate of interest on used overdrafts, unused limits are a source of “low-cost” rather than “no cost” liquidity15 to the borrower. But, as they afford convenient and flexible access to liquidity, they have a greater bearing on the availability of credit than on its cost.

II. Unused Overdrafts—The Empirical Evidence

Although the overdraft system prevails in a number of countries, only a few of them publish data on the extent of unused overdrafts, namely, Finland, New Zealand, Norway, the Philippines, and Sweden. For all these countries, the value of unused overdrafts is given on a quarterly basis, as part of the related data in the respective Monetary Surveys in the International Monetary Fund’s International Financial Statistics (IFS). Although no separate published series on unused overdrafts are available for Australia, these can be derived from the published data on outstanding overdraft limits and corresponding level of advances.

But for an adequate analysis of unused overdrafts, it is essential to have an idea not only of their absolute size but also of their magnitude relative to the outstanding limits. Such data, i.e., relating to limits outstanding and the extent of unused overdrafts, respectively, could be compiled only in respect of Australia, New Zealand, the Philippines, Norway, and Sweden. Even within this group only the data for New Zealand and Sweden were adequate for statistical analysis of the relative components of variations in unused overdrafts because of the availability of comparable series of overdraft limits and unused overdrafts on a monthly or quarterly basis over a sufficiently long period. For Finland, although the figures of unused overdrafts are published, comparable data on the limits sanctioned are not available.

Apart from the size and relative magnitude of unused overdrafts, it would be useful to analyze their distribution among different categories of borrowers by size of accounts as well as by economic sectors. This is so because the concept of liquidity, of which unused overdrafts are an integral part, is more meaningful if viewed as a “pattern” rather than merely as a quantity16 in an analysis of spending decisions and their probable impact on different sectors of the economy. In this respect, the data are grossly inadequate inasmuch as only Australia and New Zealand publish these particulars, and even for these two countries, there is only a sectoral classification and none according to the size of borrowers’ accounts.

The subsequent subsections deal, first, with the magnitude and fluctuations of unused overdrafts in New Zealand, Sweden, Australia, the Philippines, and Norway and, second, with the sectoral distribution of unused overdrafts in New Zealand and Australia. The concluding subsection brings together the main findings from the data.

The magnitude of unused overdrafts

The time series relating to unused overdrafts in New Zealand, which goes back to 1936, is the longest available among the present group of countries and is given on the basis of the average of monthly figures for each year (Table 9, column 2). It is based on the figures for “Unexercised Overdraft Authorities” given as part of the table on liabilities and assets of all trading banks (but shown separately from the other items) in the Statistical Summary for 1936-50 of the Reserve Bank of New Zealand and thereafter in its Bulletin. The total limits shown in column 1 of Table 9 are derived by adding the figures for “Advances and Discounts” published in the Statistical Summary and Bulletin to the figures for unused overdrafts. Since “Advances” also include over-drawings on accounts without or in excess of formal limits, like the seasonal drawings for tax payments, this method somewhat inflates the derived total of limits. On the other hand, it could also be maintained that it represents the effective level of limits.17 The series on “Advances and Discounts” is also subject to some limitations that, however, do not detract unduly from its utility. The inclusion of discounts is not a serious shortcoming, since discounts account for less than 5 per cent of total bank credit in New Zealand,18 which mostly is comprised of overdrafts. The series is also inclusive of interbank lending for 1936-57 and of term loans and export finance loans until April 24, 1963. Consequently, the figures since the latter date represent the real position more accurately. There is a seasonally adjusted series of advances, but this has not been used in the absence of a comparable adjusted series of limits.

Although it has been maintained that in New Zealand “allowing for very short-term deviations there is on the whole a fairly stable relationship between limits and actual advances,”19 this statement has to be construed with care, as in 10 out of 30 years (1936-66)—see Tables 9 and 11—total limits and the absolute level of unused overdrafts have moved in opposite directions. Moreover, a comparison of the relative movements of total limits and the proportion of unused overdrafts reveals a predominance of variations in opposite directions in the ratio of unused credit to total limits and those of total limits. The average ratio of unused overdrafts for this period (1936-66) works out to 39.2 per cent with a range of variation from 29.6 per cent (1952) to 45.4 per cent (1943). The monthly variations in unused overdrafts in New Zealand (Table 10) show a pronounced tendency for the troughs (i.e., the peak of advances) to cluster around March, whereas the peaks generally seem to be in December.

The statistical analysis20 (Table 1) of the variations in ratios of unused overdrafts in New Zealand shows that the seasonal component (S) is very dominant, whereas both the irregular component (I) and trend cycle (C) are comparatively small. This reflects the pattern of the New Zealand economy, where a large portion of bank credit is accounted for by such occupations as agriculture, stock raising, and meat processing, which are all subject to pronounced seasonal influences.

Table 1.New Zealand: Variations in Ratios of Unused Overdrafts, 1959–66
Average Percentage Change Without Regard to Sign
Irregular componentTrend cycleSeasonal componentRelative Contributions of Components to Percentage Change
Source: Derived from data in Table 10.
Source: Derived from data in Table 10.

The importance of seasonality is further corroborated by the size of seasonality (which, in any series, is (S), i.e., the average percentage change from quarter to quarter without regard to sign in the final seasonal factors) in New Zealand (3.54), which is well above the (S)-sized interval of 2.00 and above regarded as the high-seasonality group in a world-wide comparative study.21

The pattern of seasonality in unused overdrafts in New Zealand (Table 2) shows that November, December, January, and February are the months of high seasonality, whereas March, April, May, and June are months of low seasonality. The remaining months may be described as normal. The pattern of seasonal variation also indicates that an appreciable but not predominant part of the average amount of overdrafts outstanding during a year can serve only to a very limited extent as a liquidity substitute for money, being in effect “frozen” pending use at times of normal seasonal need. This point could be illustrated by assuming that unused overdrafts vary from zero to 200 during the year, with the average outstanding or seasonally adjusted amount being 100; none of that average figure of 100 would be available for use, for all of it would be frozen pending use at the time of seasonal peak demand for credit. In New Zealand, the range of seasonal variation is from 89 to 108, so that about 10 per cent of the average outstanding amount of unused overdrafts is frozen and only nine tenths of the total can be considered as a money substitute. If seasonal patterns could be derived for the unused overdrafts of each sector or industry, further amounts of the total would be found to be frozen in this way, for individual sectors or industries may well have their own seasonal pattern even if the aggregate of unused overdrafts exhibits no seasonality at all.

Table 2.New Zealand: Seasonal Factors (Moving Average) in Ratios of Unused Overdrafts to Limits, 1960–66
Source: Based on Table 10.
Source: Based on Table 10.

The data on unused overdrafts (commercial and savings banks) for Sweden22 (Tables 12, 13, and 14), available from 1955 on an annual basis and on a quarterly basis from 1957, show an average ratio of 13.9 per cent of unused overdrafts and a range of 9.5 per cent (1955) to 15.9 per cent (1966). The extent of unused credit in Sweden is the lowest in the group of countries covered by the present study. The relative contribution of seasonality (S) to variations in unused bank credit in Sweden (94.09 per cent)—see Table 3—is much higher than in New Zealand (82.86 per cent)—see Table 1—despite the fact that Sweden has a more industrialized economy than New Zealand.

Table 3.Sweden: Variations in Ratios of Unused Overdrafts, 1957–66
Average Percentage Change Without Regard to Sign
Irregular componentTrend cycleSeasonal componentRelative Contributions of Components to Percentage Change
Sources: Based on Tables 13 and 14.
Sources: Based on Tables 13 and 14.

The average size of seasonality (7.96) is also consequently very much higher than in New Zealand (3.54), and the seasonality is particularly high in the fourth quarter and low in all the other quarters (Table 4).

Table 4.Sweden: Seasonal Factors (Moving Average) in Ratios of Unused Overdrafts to Limits, 1957–66
Sources: Based on Tables 13 and 14.
Sources: Based on Tables 13 and 14.

The movements in ratios of unused credit in Sweden during 1955–66 are in most of the years in the same direction as those of credits sanctioned; likewise, the peaks of overdraft limits and of ratios of unutilized credit generally coincide in the month of December, whereas their respective troughs diverge markedly except for the years 1957 and 1959 when the lowest points for the two series were touched in March.

The data for Australia in respect of overdraft limits for the major trading banks are available (as on the second Wednesday of the month) for July and October 1960 and January, April, and July 1961; the regular monthly series of limits, however, commences from September 1961. (See Table 15.) Since banks in Australia are requested to include only formal overdraft limits in their returns of limits outstanding and of new approvals, any advances in excess of formal limits will generally tend to be excluded. The unused overdraft limits have been derived by deducting from the sanctioned limits the corresponding level of advances, actual as well as seasonally adjusted. The ratios for unused credit in respect of actual advances are more useful for this analysis since, like the series for limits, they exclude term loans and temporary advances to credit buyers, whereas these are included in the seasonally adjusted series of advances. No seasonally adjusted series of advances that excludes term loans and temporary advances to buyers is as yet available. A monthly series of “new and increased lending commitments” (approvals) is also available since February 1962.

Australia’s average ratio of unused overdrafts (42.2 per cent during 1961-65) and range of variation in the ratios (36.4 per cent to 48.9 per cent during 1960-66) show the extent of unused bank credit in the system, which is the highest in the group of countries covered by this study. In each of the three years (1961-63) for which complete monthly series are available, the peak of limits was reached in December, whereas the lowest level was attained in January for 1962 and 1963. On the other hand, the peak of the ratio of unutilized credit coincided with those of limits in December 1961 and 1963 but not in 1962. The lowest points of the ratios of unused credit do not show any coincidence during this period (1961-63). Another significant feature is that the movements in ratios of unused overdrafts have not always been in the same direction as those of limits. While there has been a consistent rise in limits, the series for unused overdrafts has been often interrupted by declines.

The Philippines is the only country that includes unused overdrafts in the computation of money supply. The share of overdrafts in commercial bank credit, although less than that of loans and discounts, is still substantial (Table 5).

Table 5.Philippines: Trend of Commercial Bank Credit by Types, 1949, 1954, 1959, and 1964–66(In millions of pesos)
End of

Loans and


Including Unused



Source: Central Bank of the Philippines, Central Bank News Digest.
Source: Central Bank of the Philippines, Central Bank News Digest.

The extent of unused overdrafts is shown in the published statistics separately alongside those of overdraft limits. The two series relating to total limits sanctioned and unutilized, respectively, as at the end of the year cover all commercial banks and are available for 1949-66 along with those for demand deposits and excess reserves (Table 17, columns 1 and 2). The average ratio of unused overdrafts in the Philippines for 1949-66 was 30.4 per cent with a range of 23.4 per cent (1949) to 37.7 per cent (1958). While limits have shown a virtually consistent rise over the period, the ratio of unused overdrafts has often fluctuated in an opposite direction to limits.

Overdrafts account for nearly 60 per cent of commercial bank credit in Norway and 36 per cent of savings bank credit.23 The outstanding credit limits for Norwegian banks were derived by aggregating the published total of drawings on cash credit and the figures of unused cash credits (Table 18). Norway shows a much higher average ratio of unused cash credits (37.2 per cent during 1952-66) for commercial and savings banks than Sweden, with a range of 33.3 per cent (1955) to 41.9 per cent (1960); also, in contrast to Sweden there is considerable divergence in the direction of variations in credit limits and ratios of unused credit.

The general presumption of a high average ratio of unused credit may also hold good for other countries where the overdraft system is prevalent but for which comparable data are not available. For instance, the extent of India’s unutilized credit during 1957-61 was estimated to be in the range of 34 per cent to 40 per cent (Table 6).

Table 6.India: Annual Average of Credit Limits with Scheduled Banks, 1957–61
Year Ended



Col. 2 as


of Col. 1

billion rupees
Source: See A. G. Chandavarkar, “Liquidity in the Indian Economy (1949-62),” Reserve Bank of India Bulletin (Bombay), November 1963, p. 1403.
Source: See A. G. Chandavarkar, “Liquidity in the Indian Economy (1949-62),” Reserve Bank of India Bulletin (Bombay), November 1963, p. 1403.

The distribution of ratios of unused overdrafts among categories of borrowers

The broad pattern of distribution of the ratios of unused overdraft limits by classes of borrowers for Australia and New Zealand (data for other countries are not available) shows some interesting features common to both countries.

For New Zealand a classification of limits outstanding by classes of borrowers corresponding to that for advances to the same categories is available at six-month intervals (January and July) since January 1960. The ratios of unused overdrafts by class of borrowers (Table 11) were derived as a residual by working out the relative advances/limits ratios for these groups. These data show that the highest proportions of unused overdrafts in New Zealand since 1960 were held by manufacturing (38 to 53 per cent), commerce and finance (36 to 52 per cent), construction (31 to 47 per cent), and public utilities (55 to 73 per cent). The Australian data (Table 16) relating to the second Wednesday in July and January (1962 to 1967) show that generally agriculture, grazing, and dairying held the lowest proportions of unused overdrafts (20 to 28 per cent), whereas public authorities (66 to 86 per cent), manufacturing (48 to 64 per cent), and finance (47 to 64 per cent) accounted for the highest proportions.

These data show that the urban sector tends to hold a larger share of unused overdraft facilities relative to the rural sector, which might also be the case in other primary producing countries for which similar data are not available. But these data cannot be invoked to support the view that generally the banking system in the less developed countries tends to siphon funds from the rural sector to the urban sector.24 The problem of the flow of funds between the urban and rural sectors is quite complex and would involve, among other things, an exhaustive study of the flow of total resources, including a comparison of total credit and total deposits between regions, before any conclusions could be drawn. It is therefore not possible to argue from individual items of a bank’s balance sheet or from unused limits alone that banking systems typically and deliberately divert savings from the rural to the urban sector.

There are no data on the distribution of unused overdrafts by size of accounts.25 But even assuming that most of these unused overdrafts represent the richer and more influential customers who find it easier to get large and stable overdraft limits, it does not follow that the overdraft technique by itself prejudices the allocation of credit to other customers. This distribution may represent the prudent allocation of the bank funds to customers according to normal qualitative criteria of lending.

Conclusions of the comparative survey of unused overdrafts

The foregoing survey of the size and variations of unused overdrafts and its pattern of distribution (in Australia and New Zealand) suggests the following broad conclusions.

(1) Unused overdrafts amount to a high proportion of total overdraft facilities in all countries except Sweden.

CountryAverage Ratio of Unused Overdrafts
New Zealand38.9percent(1936-66)

(2) There is no consistent pattern of relationship between the movements in the total sanctioned limits and the ratios of unused overdrafts, except for Sweden, where they tend to move in the same direction (Table 7).

Table 7.Selected Countries: Variations in Unused Credit, 1950–66 1
YearPhilippinesSwedenNorwayVariations in overdraft limits

(million Australian pounds, 1950–64; million Australian dollars, 1965–66)

Variations in ratios of unused overdrafts

in per cent)

New Zealand
Variations in overdraft limits

(million New Zealand pounds)

Variations in ratios of unused overdrafts

(in per cent)

Variations in overdraft limits

(billion kronor)

Variations in ratios of unused overdrafts

(in per cent)

Variations in overdraft limits

(billion kronor)

Variations in ratios of unused overdrafts

(in per cent)

Variations in overdraft limits

(million New Zealand pounds)

Variations in ratios of unused overdrafts

(in per cent)

1964+181.1–4.9+2.48+0.5+0.81+2.5+17 (July)–4.4–36.1+1.3
1965+77.4–1.3+3.41+0.9+0.70–0.2+26 (Jan.)+1.9–25.5–2.6
1966–37.7+6.6+2.37+0.6+1.01–0.7+95 (July)–4.4–00.5–1.6
Source: Derived from the respective country tables in the Statistical Appendix to this paper.

Column 1 shows year-to-year variations in overdraft limits in absolute values; column 2 shows year-to-year variations in the ratio of unused credit.

Source: Derived from the respective country tables in the Statistical Appendix to this paper.

Column 1 shows year-to-year variations in overdraft limits in absolute values; column 2 shows year-to-year variations in the ratio of unused credit.

(3) Seasonality is the dominant factor accounting for the variations of unused overdrafts in Sweden and New Zealand. This may be presumed to hold good for other countries, too.

(4) The urban sector accounts for larger proportions of unused overdrafts in both Australia and New Zealand than the rural sector.

III. Nature and Causes of Unused Overdrafts

The statistical evidence for the group of countries included in the present study no doubt establishes the extent of unused overdrafts in the banking system. But it is equally important to press the analysis further to find out the real character of unused overdrafts and their underlying causal factors.

The classification of overdrafts (see Section I) points to at least one possible case where an unused limit may not really represent idle credit, namely, when it is used as security for trade credit. Similarly, debtors may create mortgage securities to cover their overdrafts.26 The foregoing types wherein there is an element of “pyramiding” are exceptional and are a small proportion of total unused limits at any given point of time. Consequently, it remains to be analyzed whether the other unused overdrafts represent really idle credit or whether the statistics of unused overdrafts include a large economically fictitious element.

The notion of an overdraft limit is not always precise insofar as there are instances where no firm formal limits are granted by a bank and where, consequently, temporary excesses may be permitted beyond the assigned limit. There is, therefore, a distinction between a “firm credit limit” and a “courtesy” line that represents an informal understanding between banker and customer to extend credit facilities to a particular amount. It is the firm limits representing commitments to be guaranteed that can be considered as legitimate contingent liabilities of banks and are presumably so regarded in financial statements to stockholders and bank examiners. It is these which are aggregated as at a given point of time in banking statistics wherever they are published. They are subject to review periodically, at least once a year, but in practice many limits may remain virtually unchanged from year to year, particularly those to the larger and more influential customers.

Insofar as overdraft limits are firm, they may influence attitudes and policies of bankers and borrowers alike, although perhaps in unequal degrees. Bankers act on the assumption that they are unlikely to be called on to provide simultaneously cash for all overdraft limits outstanding at any point of time.27 In actual fact any attempt by a bank to meet all its overdraft commitments would not be possible without running down its first and second line of reserves or else without massive borrowing from the central bank. Insofar as banks know that only a certain proportion of outstanding overdrafts would be drawn upon, unused overdraft limits can be extended in excess of the amount actually available for lending. This working rule is analogous to the bankers’ objections to aggregating outstanding deposits on the ground that the total of deposits could not be simultaneously withdrawn from the banks. Both reflect the fact that bank policies and operations are based on “averages” rather than “totals.”28

From the borrowers’ side, too, there is a certain element of “water” in the figures of unused overdraft limits inasmuch as customers may not necessarily regard their limits as the likely maximum of funds needed. Rather, they may treat them both as a precautionary balance to be resorted to in an emergency and as a substitute for other financial assets in demonstrating creditworthiness.

Thus the statistics of total overdraft commitments give an exaggerated impression of the “loaned up” position of banks, because although this volume of credit is potentially capable of being utilized, in fact it is not because of established practice and convention. Nevertheless, all unused overdraft limits are not of a purely nominal character, since the availability of unused overdrafts does often determine plans and decisions of borrowers. To that extent a prudent banker will also have to take account of them. While an aggregate of all unused overdrafts in the banking system may not be very meaningful, individual unused positions may have considerable influence on the behavior of individuals or groups of borrowers.

Even allowing for the fictitious element in the over-all total of unused overdrafts, the pertinent questions are why do genuine positions of unused credit emerge at all, and are the underlying causal factors operative on both the lender’s side and the borrower’s.

From the banker’s side the practice of lending “all or nothing”29 in response to a customer’s request for overdraft limits instead of graduating the amount of credit more finely creates an element of “lumpiness” in the credit market. It is, however, quite reasonable for a banker either to grant fully a creditworthy request by a borrower or to refuse it completely. If a banker pares down a borrower’s request it will only assure that the customer obtains inadequate credit, which may lead to the failure of the project and to default on the loan. The sanction of large limits may also be one means of retaining the larger and more influential customers.

The question then arises whether there is any, even approximate, rule of thumb determining the level of overdraft limits. If banks normally adhere to a defined ratio between reserves and actual advances, the same working rules would suggest some upper limits to potential advances (unutilized overdrafts) by banks. These limits could be defined with reference to the level of excess reserves (among other factors, such as total liquid assets) so that one could postulate a twin set of operating rules with actual advances based on minimum reserves and formal overdraft limits related to excess reserves. Total credit limits would then correspond to the over-all level of reserves (the minimum statutory or conventional reserves plus any excess reserves). But the fact that the overdraft system is consistent with a position where credit limits are considerably higher than excess reserves, as in the Philippines, or else with a position of no excess reserves, as in New Zealand, indicates either that unused overdrafts can be counted upon not to result in excess credit or that the reserve position may be less important than supposed as a determinant of overdraft limits.30

The persistence of unused overdrafts even at the peak of economic activity when there is much greater demand for credit, and also during periods of credit squeeze, suggests that they cannot be attributed wholly to lags between approvals and drawings. Equally intriguing is the fact that bankers do not tend to scale down limits even with experience of high and persistent ratios of unused credit. The question as to why drawings are less than sanctioned limits could be answered somewhat along the following lines.

First, borrowers may not always estimate correctly their credit requirements and may therefore tend to ask for higher limits than are strictly necessary. On transactions account, there is always the problem of matching the time pattern of receipts and payments, which consequently necessitates maintenance of a higher average balance. In addition, experience of past credit squeezes and expectations of future ones invariably induce borrowers to ask for higher limits. Thus, purely temporary restrictions on credit may have the effect of increasing the permanent or long-term level of liquidity preference.

The practice of finance companies in Great Britain is a good example of the sort of factors that move borrowers to seek credit limits well above their normal expected requirements both in borrowing directly from the banks and in arranging acceptance credits under which they may draw bills.31 This enables them to switch their borrowing from one source (bank overdrafts, bills discounted, deposits) to another according to their relative costs from time to time and also avoids the necessity of curtailing lending operations by allowing them to call more on one source (e.g., banks) when another source (e.g., deposits) shows signs of thinning out. This is a case where the nature of the borrowers’ business makes it peculiarly advantageous to arrange for higher than normal credit requirements.

The tendency to ask for excessively high limits is perhaps reinforced by the absence of any commitment charges on unused limits, or else because such charges cost the borrower much less than the full rate of interest on bank advances. The fact that unused overdrafts cost less reduces incentives of borrowers to economize on demand for limits.

Second, if the element of seasonality accounts for a large part of the variation in the ratios of unused overdrafts, it also suggests that borrowers tend to ask for limits approximating to the estimated peak of their busy season requirements rather than their average requirements over the year. Also, as bankers follow the practice of annual review of limits, it is advantageous to fix these limits at the highest possible estimate for the year.

The net effect of the factors described above may be to create at least some positions of genuine idle credit, although it is not possible to measure their magnitude. But far from representing loss of potential income, these unused overdrafts may enable the banker to ensure that new earning assets are available to replace payoffs of advances and securities at maturity. A certain volume of unused credit gives the banker a margin of maneuverability in the periodic reshuffle of his liquid and earning assets even as some degree of unused capacity gives a firm more flexibility in production planning. It also affords a cushion against excess or overdrawn positions in other customer accounts.

In view of the oligopolistic character of the banking industry in general, it is also pertinent to pose the question whether unused overdrafts reflect imperfect competition in the credit market and whether they are related to the existence of credit rationing. Insofar as variations in the price of credit (rate of interest) do not equalize the supply and demand for credit, there may arise simultaneously excess capacity (excess reserves) and idle capacity (unused credit) on the supply side and a “fringe of unsatisfied borrowers”32 indicative of excess demand. But the Keynesian fringe of unsatisfied borrowers could be said to exist only if banks were unable to lend more because of insufficient lending capacity, i.e., they would be willing to lend more in the event of an increase in their cash reserves. Credit rationing in this sense is rare in modern banking systems in view of their access to additional lending capacity in the form of reserves of government securities, central bank credit, etc. But credit rationing in the sense of a qualitative screening of credit demand based on evaluation of creditworthiness is of the essence of sound banking and is no indication of imperfection in the credit market. The unsatisfied borrowers are mostly those who fail to measure up to the qualitative standards of creditworthiness laid down by banks. Moreover, unused overdrafts do not inhibit more lending to otherwise eligible borrowers. It is also important to stress that there are good reasons why a bank does not always strive for a “fully loaned up” position, as it has to reconcile the requirements of safety, liquidity, and profitability; if the resulting policy leads to unused overdraft limits or unused lending power (excess reserves), it cannot be regarded as a deviation from long-term profit maximization.

IV. Unused Overdrafts and Monetary Policy

The analysis of the preceding sections suggests that the element of idle credit in unused overdraft limits is apt to be exaggerated. Can it then be maintained that unused overdrafts really hamper the effectiveness of monetary policy?33 An affirmative answer might be somewhat on the following lines. Unused overdrafts represent a ready source of liquidity that can aggravate inflationary pressures, since the initiative for drawing on the limits is largely with the customers. Once the limits are sanctioned the timing and magnitude of customer drawings become an unpredictable element, as it is difficult for a bank to take restrictive actions or even attitudes. This would appear to introduce an element of uncertainty into the formulation and execution of credit policy. But the type of complication that is often attributed to overdrafts is really the lag between the announcement of a tight credit policy and its actual effects owing to the existence of unused limits. To this extent the overdraft system does complicate the mechanics of monetary policy, but it could not really be said to hamper its effectiveness since it is open to the monetary authorities to regulate both limits and advances through periodic review and regulation of outstanding and fresh overdraft limits and the advances against them.

In this respect British experience exposes the limitations of a credit policy that relies mainly on regulation of limits. The Committee of London Clearing Bankers in its evidence to the Radcliffe Committee stated: “The ‘squeeze’ operates mainly through a reduction of ‘limits,’ beneath which the actual borrowing may fluctuate widely. It is therefore by no means certain that a reduction of £X million in sanctioned limits will bring about a reduction of equal size in advances. Indeed an aggregate reduction in limits might take place without any curtailment of actual borrowings at any particular date and vice versa: less availment is made of limits in a period of contracting trade.”34

The level of existing limits and the rate of approval of fresh limits as well as the level of actual advances are all equally important in the formulation of an effective credit policy. If these variables are kept under simultaneous control by the monetary authorities, many of the problems associated with the existence of unused overdrafts would be eliminated or at least reduced to manageable proportions. This calls for adequate statistics of the size, distribution, and time pattern of unused limits and for policy responses that take account of the possibilities of changes in the ratio of unused overdrafts to limits.

V. The Treatment of Unused Overdrafts in Banking and Monetary Statistics

The analysis in Sections III and IV, which broadly suggests that the economic significance of unused overdrafts may be far less than indicated by their size, would also, by the same token, justify their exclusion from the concept of money supply and from systems of financial accounts. Most existing definitions of money supply as used by central banks and by the Fund’s Monetary Surveys in IFS exclude “unused overdraft facilities.” Moreover, balance sheets of commercial banks do not show unused overdrafts even as a contingent liability, like guarantees or acceptances. In fact, commercial bankers35 regard unused overdrafts quite differently from contra-items, like acceptances. There is a definite legal commitment on the part of customers to provide funds on maturity of acceptances whereas the total of unused overdrafts does not commit the banker to necessarily provide these facilities on demand all at once. It is therefore not a significant determinant of the lending banker’s behavior.36 This has its counterpart in company accounts that give no indication of a firm’s liquidity in the form of access to unused bank overdrafts. Similarly, estimates of idle balances37 made in investigations of liquidity preferences do not allow for unused overdrafts. All this follows from the fact that it is difficult to attach any real economic significance to the bare aggregate of unused overdrafts. Although Keynes in the early 1930’s was among the first to raise the question of treating unused overdrafts as part of bank money,38 his general position could be interpreted as a case for understanding the role of unused overdrafts and the need to collect adequate statistics on unused limits rather than a dogmatic insistence on treating them as an integral part of money. This is consistent with the position of the Macmillan Committee, of which Keynes was a member, which was more inclined to accept the commercial banker’s interpretation of unused overdrafts. Perhaps this explains why the Radcliffe Committee did not refer explicitly to unused overdrafts as one of the elements of total liquidity or to their bearing on monetary policy. Among other expert inquiries, only New Zealand’s Royal Commission on Monetary, Banking, and Credit Systems in 1956 made an explicit case (paragraphs 156 and 160 of its Report) for inclusion of unused overdrafts in money supply on the grounds of their immediate availability and general acceptability. But the Reserve Bank of New Zealand justified the exclusion of unused overdrafts from money supply on the ground that “they are not freely transferable from one person to another; some of them are merely nominal and may never be used; and finally many bank customers could obtain unexercised overdraft authorities if they so desired, but this fact is not recorded in the statistics.”39The Irish Commission of Inquiry into Banking, Currency and Credit (see footnote 1), while emphasizing the importance of unused overdrafts, did not make any specific recommendations regarding their definitional or statistical treatment.

Even on statistical grounds the case for including unused overdrafts in the definition of money supply appears questionable. Mr. William White’s study40 of the data for Finland, New Zealand, Norway, the Philippines, and Sweden came to the conclusion that the inclusion of unused overdrafts apparently does nothing to improve the value of money supply data. One of the major statistical findings of this study was that the variability of velocity of circulation consequent upon the inclusion of unused overdrafts was so small relative to the conventional velocity of money (excluding unused overdrafts) as to be unimportant (Table 8).

Table 8.Selected Countries: Differences Between Year-to-Year Percentage Changes in the Two Velocities of Circulation(Average percentage change in velocity of money plus unused overdrafts minus percentage change in velocity of money)
Finland–0.5 (1950-55)
New Zealand0.5 (1947-55)
Norway0.4 (1952-55)
Philippines0.0 (1953-55)
Sweden0.2 (1948-55)
Source: William H. White, “Interpreting Monetary Statistics When Overdrafting Is Prevalent” (mimeographed paper, September 20, 1956), Table 1, p. 19.
Source: William H. White, “Interpreting Monetary Statistics When Overdrafting Is Prevalent” (mimeographed paper, September 20, 1956), Table 1, p. 19.

But, irrespective of the logical and statistical case against inclusion of unused overdrafts in the concept of money supply, it would be useful to have complete data on their size and fluctuations as well as distribution by economic categories and size of accounts, which would facilitate more effective control by the monetary authorities of limits and advances. Moreover, “unused credit lines taken by themselves may still constitute a valuable series for forecasting money demand and money income in the short run, for many of the observed changes in unused credit lines are unconnected with the occurrence of unforeseeable events and are instead symptoms of foreseen future events—planned increases or decreases in bank-financed expenditures over a period starting a few weeks or months after the credit-line adjustment was made.”41 The analysis of the present study, in particular its revelation of the importance of seasonal factors as a causal influence in variations of unused overdrafts, also suggests that such data may have some predictive value.

Table 9.New Zealand: Unused Overdrafts1
YearTotal Limits

(Advances and Discounts)
Unused OverdraftsCol. 2 as Percentage of Col. 1Demand Liabilities

(million New Zealand pounds)
Col. 2 as Percentage of Col. 4Free Cash

(million New Zealand pounds)
(million New Zealand pounds)
Sources: Reserve Bank of New Zealand, Statistical Summary and Bulletin.

Columns 1, 2, 4, and 6 show the average of monthly figures.

Includes term loans and export finance until April 24, 1963.

Based on average of daily figures for each month. Represents excess of trading bank balances—including borrowing, if any, from the Reserve Bank—over statutory minimum balances.

Average of nine months.

Ten months.

Sources: Reserve Bank of New Zealand, Statistical Summary and Bulletin.

Columns 1, 2, 4, and 6 show the average of monthly figures.

Includes term loans and export finance until April 24, 1963.

Based on average of daily figures for each month. Represents excess of trading bank balances—including borrowing, if any, from the Reserve Bank—over statutory minimum balances.

Average of nine months.

Ten months.

Table 10.New Zealands Monthly Variations in Unused Credit, July 1959-April 1967
Last Balance Day

(Wednesday) in
Total Credit LimitsUnused OverdraftsCol. 2 as Percentage of Col. 1
million New Zealand pounds
Source: Reserve Bank of New Zealand, Bulletin.

From October 1963 a sum of £NZ 19 million, allocated as a result of redefinition of overdraft arrangements, is included.

Source: Reserve Bank of New Zealand, Bulletin.

From October 1963 a sum of £NZ 19 million, allocated as a result of redefinition of overdraft arrangements, is included.

Table 11.New Zealand: Distribution of Unused Overdrafts by Classes of Borrowers, 1960–671
Jan. 13July 13Jan. 11July 12Jan. 10July 11Jan. 9July 10Jan. 8July 8Jan. 13July 14Jan. 12July 13Jan. 11
1.Farming, forestry, etc.(a)41.541.744.644.243.742.342.842.445.844.645.646.344.645.547.5
2.Mining and quarrying(a)
5.Electricity, gas, water, etc.(a)
6.Transport and communications(a)
7.Commerce and finance(a)87.8110.896.2100.6100.898.3101.398.2111.9112.6120.5122.5122.2121.7125.5
8.Local institutions(a)
Source: Derived from figures of limits and advances by categories of borrowers in Reserve Bank of New Zealand, Bulletin.

(a) represents limits in millions of New Zealand pounds; (b) represents advances in millions of New Zealand pounds; (c) represents unused overdrafts as percentage of limits.

Source: Derived from figures of limits and advances by categories of borrowers in Reserve Bank of New Zealand, Bulletin.

(a) represents limits in millions of New Zealand pounds; (b) represents advances in millions of New Zealand pounds; (c) represents unused overdrafts as percentage of limits.

Table 12.Sweden: Unused Bank Credit, 1955–66
End of YearCredit SanctionedUnused Bank CreditCol. 2 as Percentage of Col. 1
billion kronor
Source: International Monetary Fund, International Financial Statistics.
Source: International Monetary Fund, International Financial Statistics.
Table 13.Sweden: Unused Overdrafts, 1957–60
YearOverdraft LimitsUnused OverdraftsCol. 2 as Percentage of Col. 1
billion kronor
Source: International Monetary Fund, International Financial Statistics.
Source: International Monetary Fund, International Financial Statistics.
Table 14.Sweden: Unused Overdrafts, 1961–66
Overdraft LimitsUnused OverdraftsCol. 2 as Percentage of Col. 1Overdraft LimitsUnused OverdraftsCol. 2 as Percentage of Col. 1Overdraft LimitsUnused OverdraftsCol. 2 as Percentage of Col. 1
billion kronorbillion kronorbillion kronor
Mar I16.642.0012.017.142.2231.019.962.4112.1
Jun II16.702.0112.017.602.2312.721.062.6812.7
Sep III16.952.0011.818.312.2712.421.672.6312.1
Dec IV16.972.4314.318.942.7414.522.453.1113.9
Mar I23.112.8212.225.563.2312.629.193.7512.8
Jun II23.513.0212.826.803.4813.030.003.9713.2
Sep III24.232.9812.326.963.5013.030.254.0113.3
Dec IV24.933.6014.428.344.3415.330.714.8815.9
Source: International Monetary Fund, International Financial Statistics.
Source: International Monetary Fund, International Financial Statistics.
Table 15.Australia: Unused Overdrafts of Major Trading Banks, July 1960-January 1967
Second Wednesday inOverdraft Limits1

Unused Overdrafts (Actual)1

Unused Overdrafts (Seasonally Adjusted)

Col. 2 as Percentage of Col. 1

Col. 3 as Percentage of Col. 1

In millions of Australian pounds
In millions of Australian dollars
Sources: Reserve Bank of Australia, Statistical Bulletin (Sydney); Australian Financial Review (Sydney); Commonwealth Treasury, Treasury Information Bulletin (Canberra).

Excludes temporary advances to wool buyers and term loans.

Sources: Reserve Bank of Australia, Statistical Bulletin (Sydney); Australian Financial Review (Sydney); Commonwealth Treasury, Treasury Information Bulletin (Canberra).

Excludes temporary advances to wool buyers and term loans.

Table 16.Australia: Percentage Distribution of Unused Overdraft Limits1of Major Trading Banks by Categories of Borrowers as on the Second Wednesday, July 1962-January 1967










Agriculture, grazing, dairying20.123.822.928.824.828.220.721.820.224.2
Retail trade35.342.037.044.937.544.336.535.830.340.1
Wholesale trade47.649.651.257.852.
Other business38.039.937.940.239.554.736.439.932.937.2
Public authorities278.670.286.476.985.476.783.776.580.666.4
For housing20.
For other purposes25.827.125.427.124.927.224.826.622.325.8
Nonprofit organizations50.447.251.749.151.150.851.149.647.245.5
Source: Derived from Commonwealth Treasury, Treasury Information Bulletin, tables showing the usage of overdraft limits.

Excludes limits in respect of temporary advances to wool buyers and term loans.

Excludes Commonwealth and State Governments.

Source: Derived from Commonwealth Treasury, Treasury Information Bulletin, tables showing the usage of overdraft limits.

Excludes limits in respect of temporary advances to wool buyers and term loans.

Excludes Commonwealth and State Governments.

Table 17.Philippines: Unused Overdrafts of Commercial Banks, 1949–66
End of YearOverdraft LimitsUnused OverdraftsCol. 2 as Percentage of Col. 1Demand Deposits

(million pesos)
Col. 4 as Percentage of Col. 1Excess Reserves

(million pesos)
(million pesos)
Source: Central Bank of the Philippines, Central Bank News Digest.
Source: Central Bank of the Philippines, Central Bank News Digest.
Table 18.Norway: Unused Overdrafts, 1948–66
YearOverdraft LimitsUnused OverdraftsCol. 2 as Percentage of Col. 1
billion kronor
Sources: Based on data from the International Monetary Fund, International Financial Statistics, and Norges Bank, Economic Bulletin.
Sources: Based on data from the International Monetary Fund, International Financial Statistics, and Norges Bank, Economic Bulletin.

Découverts bancairés inutilisés : leurs implications pour l’analyse et la politique monétaires


L’auteur examine la nature, les causes et l’importance des découverts inutilisés des banques commerciales et leurs implications pour l’analyse et la politique monétaires, à la lumiére des statistiques appropriées, lesquelles ne sont disponibles que pour l’Australie, la Nouvelle-Zélande, les Philippines, la Suède et la Norvège.

D’une façon générale, l’analyse montre que les découverts non utilisés représentent en moyenne entre 30 et 44 pour cent de l’ensemble des découverts, sauf en Suède où ils sont de l’ordre de 14 pour cent; il n’existe pas de relation logique entre les mouvements des limites totales autorisées de ces avances et les coefficients des découverts non utilisés, sauf en Suéde oÚ ils ont tendance à évoluer dans la même direction; pour les pays à l’égard desquels on dispose de données suffisantes pour permettre d’analyser les composantes du changement (cas de la Suède et de la Nouvelle-Zélande), les variations des coefficients des découverts inutilisés sont fonction principalement de facteurs saisonniers; d’autre part, en Australie comme en Nouvelle-Zélande—les seuls pays qui publient des données sur la ventilation sectorielle des découverts non utilisés—le secteur urbain intervient pour une proportion plus élevée du total des découverts non utilisés que le secteur rural.

L’analyse révèle aussi que la technique du découvert peut compliquer la mise en œuvre de la politique du credit sans cependant en amoindrir réellement l’efficacité. Bien que l’inclusion des découverts inutilisés dans le concept de la masse monétaire ne semble pas améliorer sensiblement la valeur explicative des statistiques monétaires, telle que la vitesse de circulation de la monnaie, il serait néanmoins souhaitable, pour faciliter l’élaboration de la politique monétaire, d’avoir des données sur l’importance et la ventilation des découverts inutilisés. Utilisées dans les modèles monétaires, il est même possible que ces données puissent permettre d’établir des pronostics. Il est toutefois nécessaire d’examiner empiriquement de façon plus approfondie les différents aspects des découverts inutilisés.

Sobregiros bancarios no utilizados: su trascendencia en cuanto al análisis y a la política monetarias


Este artículo examina la naturaleza, las causas y la magnitud de los sobregiros no utilizados en los bancos comerciales y la trascendencia de los mismos en cuanto al análisis y a la política monetarias, a la luz de los datos pertinentes, de los cuales se dispone sólo para Australia, Nueva Zelandia, Filipinas, Suecia y Noruega.

En general, el análisis muestra que el monto promedio de los sobregiros no utilizados oscila entre el 30 y el 44 por ciento, excepto en Suecia, donde se aproxima al 14 por ciento. No existe una relación consistente entre los movimientos en los límites totales de sobregiro autorizado y los porcentajes de sobregiro no utilizados, salvo en el caso de Suecia, donde ambos tienden a variar en la misma dirección. En los países para los que se cuenta con datos adecuados para analizar los componentes de las diferencias (Suecia y Nueva Zelandia), las variaciones en la proporción no utilizada de sobregiros, son predominantemente debidas a factores de estacionalidad. Al sector urbano corresponde una proporción de los sobregiros no utilizados mayor que al sector rural, tanto en Australia como en Nueva Zelandia, que son los dos únicos países que publican datos sobre la distribución sectorial de los sobregiros no utilizados.

El análisis también sugiere que la mecánica del sistema de sobregiros puede presentar complicaciones en la ejecución de la política crediticia, sin menoscabo, empero, de la eficacia de ésta. Aun cuando el incluir los sobregiros no utilizados dentro de la oferta de dinero no parece mejorar sustancialmente el valor explicativo de los parámetros estadísticos de tipo monetario, tales como la velocidad de circulación, a los efectos de política sería útil, no obstante, disponer de datos adecuados sobre la cuantía y la distribución de los sobregiros no utilizados, los que pueden incluso tener un cierto valor predictivo en modelos monetarios. Es menester, sin embargo, llevar a cabo investigaciones empíricas adicionales sobre los distintos aspectos de los sobregiros no utilizados.

Mr. Chandavarkar, Advisor in the Asian Department, is a graduate of the University of Bombay and of the London School of Economics. He taught economics at the Sophia College, Bombay, and at the Osmania University, Hyderabad. He also served as Economic Advisor, Bank of Libya; Director in the Economic Department, Reserve Bank of India; Research Officer, Bank Award Commission, Government of India. He has contributed a number of articles to economic journals.

There are references to unused overdrafts in F. Lavington’s The English Capital Market (London, 1921—reprinted, New York, 1968, p. 136); Minutes of Evidence Taken Before the Committee on Finance and Industry—hereinafter referred to as the Macmillan Committee (London, 1931), Questions 525-33, 547-48, 553-54; John Maynard Keynes, Treatise on Money (London, 1930), Vol. I, pp. 41 ff., and Vol. II, p. 35; Ireland, Commission of Inquiry into Banking, Currency and Credit: Reports (Dublin, 1938), p. 159; H. C. Coombs, The Development of Monetary Policy in Australia (University of Queensland Press, 1955), p. 15; Reserve Bank of New Zealand, Money and Banking in New Zealand (1963), pp. 63, 72, and 83; R. S. Sayers, Modern Banking (Oxford University Press, 1967), passim. But the exhaustive treatise of John Alexander Galbraith, The Economics of Banking Operations: A Canadian Study (McGill University Press, 1963) does not deal with problems of unused credit.

There is a reference to unused overdraft limits in the evidence submitted by the London Clearing Banks to the Committee on the Working of the Monetary System [Radcliffe Committee], Principal Memoranda of Evidence (London, 1960), Vol. 2, para. 30, p. 51.

William H. White, “Interpreting Monetary Statistics When Overdrafting Is Prevalent” (mimeographed paper, September 20, 1956).

A notable exception is Professor H. W. Arndt’s article, “Overdrafts and Monetary Policy” (Banca Nazionale del Lavoro, Quarterly Review, September 1964, pp. 233-62), which deals with the implications of the overdraft system for monetary policy in the light of Australian and New Zealand experience. But Professor Arndt’s analysis appears to overstate the real bearing of unused overdrafts on monetary policy.

For instance, a study of the operations of the Federal Loans Board in Nigeria came to the conclusion “that, rather than a large number of viable projects vainly seeking capital, capital has been vainly seeking viable private projects… this is true not only of Nigeria, but of many other of the more economically underdeveloped countries as well,” Sayre P. Schatz, “The Capital Shortage Illusion: Government Lending in Nigeria,” Oxford Economic Papers, New Series, Vol. 17 (1965), p. 316.

Bank of Canada, Statistical Summary, November 1967, p. 796.

“Bank credit in the United States is customarily extended in the form of advances against or discounts of promissory notes. The amount of overdrafts is insignificant…. Overdrafts are regarded as an irregular and bad form of lending…. The supervisory authorities discourage overdrafts because ordinarily they do not represent prearranged accommodation.” Benjamin Haggot Beckhart, ed., Banking Systems (Columbia University Press, 1954), p. 871.

But the “credit line” arrangements of banks in the United States are akin to overdrafts, since they involve a blanket grant of a maximum credit limit.

The results of the Survey of Member Bank Loans for Commercial and Industrial Purposes (conducted by the Federal Reserve System as of October 5, 1955), which included all member banks with deposits of $50 million and over and a declining proportion of each smaller size class, showed that more than half the banks in the sample extended lines of credit. But the term “credit line” appears to cover both (1) an informal understanding between the borrower and the bank as to the maximum amount of credit that the bank will provide at any one time and (2) a firm commitment to make an advance to a borrower, which is generally a binding legal agreement in which the terms and conditions are defined and for which the bank usually charges a fee. According to the Survey only a few reporting banks made a clear distinction between credit lines and firm commitments.

Credit lines are usually for one year or less and are reviewed at least once a year. Minimum deposit balances bearing some relation to the amount borrowed or the maximum line of credit are often required of customers. Payoffs are required annually or more frequently. Credit lines are most commonly associated with borrowing for seasonal and recurring requirements. See Caroline H. Cagle, “Credit Lines and Minimum Balance Requirements,” Federal Reserve Bulletin, June 1956, pp. 573-76.

Sayers, Modern Banking (cited in footnote 1), p. 8.

The cash credit is “an arrangement under which a customer is allowed an advance up to a certain limit, against a ‘bond of credit’ (q.v.) by one or more sureties…. The customer need not take the whole advance at once, but may draw the amount as required,” Thomson’s Dictionary of Banking (London, tenth edition, 1951), p. 136.

The overdraft and the cash credit are substantially similar. Historically, the overdraft derives from the Scottish innovation of the cash credit which was introduced by the Royal Bank of Scotland in 1729. (Maxwell Gaskin, The Scottish Banks, London, 1965, pp. 144-46; Adam Smith, Wealth of Nations, ed. by Edwin Cannan, London, 1904, Book II, Chapter II—first published in 1776). But the cash credit bond is being gradually replaced by the simpler and more modern letter of guarantee (Thomson’s Dictionary of Banking, London, eleventh edition, 1965, p. 615).

Compensatory balances are demand deposits which the customer is supposed to maintain, usually amounting to between 10 per cent and 20 per cent of the face value of the loan or of the line of credit. (Cagle, op, cit., pp. 575-79.) Such compensatory balances are quite common for loans under lines of credit, and the great majority of banks require such balances from at least some borrowers. A Federal Reserve study found that in 1955 approximately one fourth of the banks surveyed had minimum balance requirements for some of their business borrowers and that more than 90 per cent of the banks with deposits of $500 million and over had such requirements. Subsequent surveys also show that the great majority of banks require such balances from at least some borrowers. (Thomas Mayer and Ira O. Scott, Jr., “Compensatory Balances: A Suggested Interpretation,” The National Banking Review, U.S. Treasury, Washington, December 1963, pp. 157-58.)

J. H. Clemens, Bank Lending (London, 1963), p. 20.

“Every day in Britain bank managers’ clerks give them a list of accounts where customers have drawn cheques beyond their available credit balance or beyond their limit of overdraft. In most cases the bank manager easily reaches a decision and pays the cheques or dishonours them without further ado…. These ‘excess positions’ vary greatly in gravity, but if large they are soon in the hands of head office,” F. Meddings, “The Gentle Art of Lending,” The Bankers’ Magazine (London), June 1967, pp. 351-52.

This classification is based on prevailing practice in Australia as described by Arndt, op. cit., pp. 239-41, and in the absence of information on other countries is useful in understanding generally the mechanics of unused credit under the overdraft system.

In Europe, with the exception of the United Kingdom where there are no charges on unused limits, the fees range from 1 per cent (in the Netherlands and the Scandinavian countries) to 3 per cent (in the Federal Republic of Germany). For details, see “Short-Term Borrowing in Europe,” The Banker (London), May 1967. The National Board for Prices and Incomes in its inquiry into bank charges in the United Kingdom (Report No. 34, Bank Charges, Cmnd. 3292, London, 1967) examined the charges on operation of customer accounts but did not study or even refer to the question of charges on unused overdraft limits.

In New Zealand the overdraft service fee introduced in November 1961 “is based on the limit or the highest actual advance recorded (whichever is the higher) during the year ended 31st October and it rises in steps from £1 for limits up to £100, to £50 for limits over £50,000,” Money and Banking in New Zealand (cited in footnote 1), p. 5.

In India there is a minimum interest clause in overdraft agreements whereby interest is charged on a stated portion, say, one fourth to one half of total limits, for the full period, irrespective of whether utilization reaches that ratio or not. There are also service charges on unused limits ranging up to V% of 1 per cent on fresh limits and at ¼ of 1 per cent on renewals, “Service Charge on Bank Advances,” Commerce (Bombay), February 4, 1967, p. 192.

In Australia, with effect from January 1, 1966, the trading banks introduced charges on the unused portion of overdraft accounts with limits of $A 100,000 and over. These charges range from Vi of 1 per cent to 1 per cent per annum according to the size of the unused limit, with rebates for credit balances and fixed deposits in excess of the amount of the overdraft. There is no charge when the unused portion is 10 per cent or less of the total limit and the charges are subject to a maximum of $A 40,000 a year.

Therefore the case where “an unused limit is virtually a free good” referred to by Arndt, op. cit., p. 260, is really the exception rather than the rule in most banking systems today.

On this approach to liquidity, see Joan Robinson, “General Liquidity,” The Banker (London), December 1960, reprinted in Collected Economic Papers, Vol. III (Oxford, 1965), pp. 125-31.

*This [i.e., total credit limits] is not a precise figure, as there are cases where no firm limit is fixed, or where a temporary excess is permitted beyond the fixed limit, or where a limit is needed for only a few days or weeks in the year. Nevertheless, the figures are probably sufficiently accurate for the purpose of showing trends.”

“… Trends in this figure (as distinct from minor short-term changes) can be significant as indicating changes in the banks’ lending policies and in the demand for advances, and giving a preview of likely changes in actual advances …” A. R. Low, “Changes in Bank Advances,” Reserve Bank of New Zealand Bulletin, June 1959, p. 84.

“Trading banks’ discounts (of bills of exchange for customers) as at 21st February, 1963, amounted to £5.8 million, or 3.1 per cent of total advances and discounts, and these applied mainly to import of goods, and not to internal commerce,” Money and Banking in New Zealand (cited in footnote 1), p. 5.

Money and Banking in New Zealand (cited in footnote 1), p. 6. See also A. R. Low’s observation that actual “advances tend to average between 60 and 65 per cent, of limits, and any deviation from that range is usually temporary. A drop in the percentage when limits are steady or rising foreshadows a rise in advances in the near future. A rise in the percentage above normal can occur quite sharply (as in 1951-52) because of events over which the trading banks have no control in the short run, and many millions of pounds may be involved. (An additional 10 per cent, usage of existing limits means £28 million.) For these reasons, the Reserve Bank regards the trend in total credit limits and in the unexercised portion of these limits as being of considerable importance,” op. cit., p. 84.

These results were obtained by the application of the X-11Q Quarterly Seasonal Adjustment Program developed by the U.S. Bureau of the Census. The details of the adjustment and of the computer programing are as indicated in the article, “Seasonality in World Financial and Trade Data,” by J. B. Gupta, Staff Papers, Vol. XII (1965), pp. 354-55.

See Gupta, op, cit., pp. 355-57.

“Credits on current accounts, which amounted to 25 per cent, of total lending, [i.e., in May 1960] are similar to overdrafts in the English system,” G. Clayton, “Sweden,” Banking in Western Europe, ed. by R. S. Sayers (Oxford University Press, 1962), p. 276.

Bank credit in Norway at the end of 1959:

Commercial BanksSavings Banks
million kroner
Current drawing accounts

Loans on customers’ bonds1,0921,175
Norwegian bills discounted695107
Source: R. S. Sayers, “Norway,” Banking in Western Europe (cited in footnote 21), p. 302.
Source: R. S. Sayers, “Norway,” Banking in Western Europe (cited in footnote 21), p. 302.

“Studies in many countries have shown how the banking system, if not regulated to act differently, easily becomes an instrument for siphoning off the savings from the poorer regions to the richer and more progressive ones where returns on capital are high and secure,” Gunnar Myrdal, Development and Under-Development (National Bank of Egypt, Fiftieth Anniversary Commemoration Lectures, Cairo, 1956), p. 29. But Myrdal himself does not present any empirical evidence or analytical reasoning in support of his observation.

According to Arndt, “Some banks in Australia have found that the relation between advances and limits is much more stable if the large accounts are eliminated from the statistics. Similarly, in England quite large slices of total bank advances are thought to be due to a few giant firms who use overdrafts as stop-gaps in their capital development programmes. A size analysis of the statistics of limits and advances would be useful to test this point,” op. cit., p. 258.

T. Balogh, Studies in Financial Organization (Cambridge University Press, 1947), p. 75, footnote 2.

On this, see the evidence to the Macmillan Committee by the British bankers Messrs. Goodenough and Hyde. They did not give any indication of the size of unused overdrafts (Questions 545-46). Mr. Goodenough thought that the publication of such a figure, which might be regarded as an additional hitherto suppressed liability of the banks, would undermine public confidence. Mr. McKenna, a member of the Committee, who agreed with him, also added that a total of overdraft limits would be misleading because “a limit is intended to be used at that season of the year when there is the maximum demand in that particular industry” (Question 547) and also because it was highly unlikely that all limits would be used simultaneously (Question 528). According to Professor Sayers, “English banks have … maintained that any statistical summary of these unused overdraft facilities would be unrealistic,” the Macmillan Committee, op. cit., p. 35.

“The whole business of public banking is carried on on averages. It is not the totals. We never suppose that the whole of our current-deposit accounts can be drawn upon at one moment; we know by experience, just as an insurance company knows by experience, that the whole business is conducted upon averages,” Mr. Goodenough, the Macmillan Committee, op. cit., Question 529.

“As a general rule, a banker is likely to lend ‘all or nothing’…. Except when it is a question of an excessive estimate of requirements, an English banker is unlikely to offer a proportion only of the funds sought … where it is usual for a customer to borrow from several bankers (e.g., in France), generally on the basis of discountable paper … it is possible and common for the customer to secure a proportion of his accommodation from one banker and to seek the rest elsewhere in the banking system … where the bulk of the money lent is made available by way of overdraft, the ‘all or nothing’ principle is probably difficult to supplant,” J. S. G. Wilson, “Credit Rationing and the Relevant Rate of Interest,” Chapter 2 in his Monetary Policy and the Development of Money Markets (London, 1966), p. 37.

“The total of all overdraft facilities afforded is governed by the margin of free resources available to the banks, and by their knowledge of the seasonal character of the demands of different industries, so that different calls upon their resources dovetail into one another,” Commission of Inquiry into Banking, Currency and Credit: Reports (cited in footnote 1), p. 159.

Sayers, Modern Banking (cited in footnote 1), p. 163.

“There is normally a fringe of unsatisfied borrowers who are not considered to have the first claims on a bank’s favours, but to whom the bank would be quite ready to lend if it were to find itself in a position to lend more,” Keynes, op. cit., Vol. II, p. 365.

“The banks’ direct control over movements in their advances is reduced to the extent that drawings may be made by customers against limits approved in an earlier period. A tightening of a bank’s lending policy will, therefore, not be immediately effective. Even the rate of creation of new advance limits cannot always be changed immediately. This makes it difficult for the banks to adjust their advances promptly to the general needs of the economy, and in a period of rising activity can cause bank lending to add to any inflationary tendencies,” Coombs, op. cit., p. 15.

“In both the 1955 and 1960 booms in Australia, advances continued to rise while the trading banks, under central bank direction, were cutting back new lending. In 1961 and 1962, while the authorities were effectively encouraging the banks to pursue freer lending policies, advances first continued to decline and then stagnated; by February 1964, advances, though much above recession level and continuing to rise, accounted for little more than one-half of total overdraft limits, a situation which gave rise to fears of an uncontrollable ‘explosion of advances’ in a new boom,” Arndt, op. cit., p. 233.

See Principal Memoranda of Evidence (cited in footnote 2), Vol. 2, para. 30, p. 51.

In his evidence before the Macmillan Committee, Mr. Goodenough clearly denied the analogy between unused overdrafts and acceptances. He said, “When you publish your acceptances it is equivalent to the publication of actual liabilities under that head, and on the other side of the balance sheet you put a corresponding asset representing the definite undertaking of the customer to provide the necessary funds at maturity. That is right and proper. The public wish to know what liabilities you are incurring. With your current and deposit accounts you put out the total, but it is clear that the withdrawal of these deposits must be based on averages,” Question 531. (See also Questions 532-33 and replies by Mr. Goodenough, the Macmillan Committee, op. cit.)

This therefore weakens the force of Professor Arndt’s observation: “Paradoxically, the Australian trading banks meticulously record their ‘contingent liabilities’ under confirmed letters of credit, guarantees, etc., but never so much as mention their much larger and very real demand liabilities in the form of unused overdraft limits,” op. cit., p. 237.

See A. J. Brown, “Interest, Prices, and the Demand Schedule for Idle Money,” Oxford Economic Papers, No. 2 (May 1939), pp. 46-69, and A. M. Khusro, “An Investigation of Liquidity Preference,” Yorkshire Bulletin of Economic and Social Research, Vol. 4 (1952), pp. 1-20.

“There exists in unused overdraft facilities a form of Bank-Money of growing importance, of which we have no statistical record … the Cash Facilities, which are truly cash for the purposes of the Theory of the Value of Money, by no means correspond to the Bank Deposits which are published. The latter … take no account of something which is a Cash Facility, in the fullest sense of the term, namely, unused overdraft facilities. So long as savings deposits and unused overdraft facilities are both of them a nearly constant proportion of the total deposits, the figures of Bank deposits as published are a sufficiently satisfactory index of the amount of Cash available. But if … these proportions are capable of wide fluctuations, then we may be seriously misled … by treating Bank Deposits as identical with Cash,” Keynes, op. cit., Vol. I, pp. 42-43.

Reserve Bank of New Zealand, Monetary and Fiscal Policy in New Zealand (Wellington, 1955), p. 32.

White, op. cit.

White, op. cit., p. 20.

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