Canada's Industrial Development Bank

SIR ARTHUR CHETWYND:

My Lord Bishop, Reverend Sir, distinguished guests, ladies and gentlemen: During our 1974-75 season, we have had the privilege of welcoming to this rostrum three very distinguished citizens from the Province of Quebec--all politicians--two from the federal political scene (one who is a senior cabinet minister) and one provincial cabinet minister.

Today, we welcome another distinguished visitor, this time a banker, who makes his headquarters in Montreal. As he is an old Toronto boy, and his first language is English, you are going to be spared another of my outstanding bilingual introductions!

Perhaps, some of you may have heard the story about the learned judge who, before sentencing a culprit for bank robbery, observed that this was the ninth time the same man had appeared before him in his court on the same charge. The judge, showing some pique and irritation, asked the gentleman in question why he persisted in his career of robbing banks. The bank robber replied politely, "Your Honour, it's simple. That where the money is!"

There is an old saying, "Money makes the mare go!" Our guest speaker today is a "money" man--at least he heads an organization which controls a great deal of money, in trust for the people of Canada, but available for putting out on loan. His name is E. Ritchie Clark, and he is the chief general manager of Canada's Industrial Development Bank with head office in Montreal.

The Industrial Development Bank was created in 1944, mainly to supply credit to small and medium-sized businesses, as it was felt that such businesses did not have a ready source of term financing, while the larger corporations generally had no trouble in satisfying their needs in the conventional money markets.

The importance of small business in Canada cannot be overemphasized. I have a bias in saying this, as I am a small businessman, along with many others. Did you know, for instance, that businesses (taking all kinds into account) with fifteen or fewer employees provide employment for 40% of Canada's working population? And did you know that businesses with a hundred or less employees provide a place to work for 60% of our country's working population? Indeed, about 95% of the businesses in Canada are categorized by some as "small or medium-sized," and they produce at least half of Canada's gross national product.

It has seemed to me that if the secret ballot has brought political democracy to our society, then perhaps credit (in the form of the I.D.B. and, of course, other lenders) has gone a long way toward democratizing our country economically. For the small, hardworking entrepreneur usually can only have a chance if some financing is available to bring his or her product to market, or ideas to fruition.

I might be the last in this room to say that I understand banks or bankers. I do know about "tight money" periods because, as a businessman, I have suffered through them, although on a couple of occasions I have felt a kinship for the small manufacturer who, on his deathbed, named six bankers as pallbearers, explaining that as they had carried him for so long they might just as well finish the job!

Our speaker today was born in Toronto. He was educated at North Toronto and Oakwood Collegiate Institutes and the University of Toronto. He graduated from the U. of T. with a Bachelor of Commerce degree. He joined the Bank of Nova Scotia in its economics department, and subsequently served in various branches and departments of the bank in Toronto and New York. In 1942 he joined the R.C.A.F. He was attached to the R.A.F. overseas and attained the rank of Flying Officer. As such he commanded R.A.F. units as a radar officer.

On his return to the Bank of Nova Scotia, following the war, Mr. Clark entered the credit department at the general manager's office. In 1947 he joined the Industrial Development Bank as a credit officer and served in that capacity in various centres until he was appointed assistant general manager in 1962. He became deputy general manager in 1966, and general manager in 1969. In 1973 he was appointed to his present position as chief general manager of the Industrial Development Bank.

Ladies and gentlemen, speaking on the subject of "Canada's Industrial Development Bank", it gives me much pleasure to introduce to you Mr. Edward Ritchie Clark, who was also once a member of the Empire Club-and we'll get him again! Mr. Clark.

MR. CLARK:

Distinguished guests, ladies and gentlemen: Thank you, Mr. Chairman, for your very kind words. I consider it a great distinction to have an opportunity to speak before the Empire Club, and I am very grateful for the chance you give me to talk about the Industrial Development Bank. I appreciate particularly the delicacy with which you have arranged to have at the head table representatives of two of the institutions which were probably more important than any others in my upbringing and formation. In the first place, we have a representative of Oakwood Collegiate, which is undoubtedly the best school in Toronto, and we have Mr. Jim Joyce, who I believe is here representing the Moore Park Ratepayers' Association!

Then, further, as a native Torontonian, it is a particular pleasure to speak in what is perhaps the only place in Canada where such a person can admit to his birthplace and receive a sympathetic hearing!

I am to speak to you today about the Industrial Development Bank, a unique financial institution in Canada which has served small and medium-sized businesses for thirty-one years, and which will shortly assume additional responsibilities under a new name, the Federal Business Development Bank.

A great deal has been spoken and written about the I.D.B. in the past thirty-one years. Some of the comment (perhaps the minor part) has been complimentary, and some has been critical, and not all the criticism was of the same things. Some people say that we lend too much money, and so we improperly displace commercial sources of funds. Others say we do not lend enough money, so that some needy businesses have to go without the financing they require. Some say we process loan applications too slowly. Others say we process them much too quickly, so quickly indeed that alternative sources do not have sufficient time in which to make up their own minds as to whether they would make the loan themselves. Some claim that we take too much security, but others say that our terms are so soft as unfairly to undermine the position of other lenders. Some say our rates of interest are too high. This is a position that we share with practically every other lender. But others also say our rates are much too low, and do not properly reflect conditions in the money market. Some say that we do not lose enough money. Others say that we operate on too small a margin of profit. Some say we only make safe, conservative loans. Others accuse us

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*Mr. Joyce is the Chairman of the Ontario Development Corporation.

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of supporting weak businesses which could not otherwise be able to stand up to competition.

When it comes to the I.D.B.; you have lots of ideas to choose from.

The bank was created by Parliament in 1944, as a wholly-owned subsidiary of the Bank of Canada, partly to combat any inclination in the Canadian economy towards an industrial recession following the Second World War, but principally to fill what was believed to be a gap in the financial structure of the country, in that small and medium-sized businesses did not have then a readily accessible source of term financing. Large corporations could meet their needs for long-term capital through normal commercial sources or through bond or stock issues on the public market, but a small business, needing perhaps $10,000 or $15,000 or even a few hundred thousand dollars, could not easily obtain term financing, as distinct from current daytoday financing, in these ways. The I.D.B.'s role was to provide these businesses with a source of this kind of financing.

Converting the vocabulary of our statute into plain language, the role of the I.D.B. is to extend financial assistance to any business in Canada if the bank believes it would not otherwise be available on reasonable terms and conditions, and if the investment in the business by others is considered to afford the bank reasonable protection.

While the Industrial Development Bank was to fill a gap in the financial structure of the country, it was intended that, in doing so, it should supplement and not displace other financial institutions. This kind of assignment places a heavy responsibility on the judgment and discretion of the bank, and in his ordinary daily work, every officer of the bank is conscious of it, and makes a sincere and conscientious effort to observe the full spirit of this responsibility. It may be that in seeking to do so there may be cases of some error in judgment on our part in applying the principle of our only assisting where the money is not available elsewhere on reasonable terms and conditions, but this is surely to be expected. Considering that we are now approached each year by approximately twenty-five to thirty thousand businesses, it is almost inevitable that somewhere among all these cases we should, with even the best intentions in the world and the most sincere efforts to achieve perfection, fall short of our intentions.

Formal instructions on this area of policy are issued to all officers to guide them in the various circumstances they may encounter, and there is a constant flow of correspondence between our office in Montreal and the field offices dealing with the questions that arise in this matter. In every case, we check with the applicant's chartered bank manager as to his view of the proposal, which brings to the latter's notice that an application has been made to the I.D.B. When discussing a loan proposal with an applicant, the credit officer of the I.D.B. will always consider the prospects of the money required being obtained elsewhere, and frequently we ask for positive evidence that he has been unsuccessful in his attempts to obtain the money.

Our loans have brought many a small business along somewhat as a young student is first introduced to school, until the business, like the youngster, is big enough and strong enough to get out into the schoolyard to play with the bigger boys.

Most of our borrowers do not return to the I.D.B. for a second loan, and it certainly must be the case that practically all of them, with their long-term finances settled on a sound basis at a critical time in their lives through I.D.B. assistance, have gone on to be good borrowers for all sorts of financial needs from other commercial lenders--from chartered banks, finance companies, mortgage companies, and others.

Indeed, I think it can be fairly said that in almost every case of a loan from ourselves, the injection into a business of I.D.B. term financing on a proper basis, and the careful administration of our loan account which follows, have made a borrower from the bank a soundly-based client for some other financial institution.

There is a second stipulation in our act, that the investment in the business be such as to afford the bank reasonable protection. This is a fairly broad concept covering the whole subject of the soundness and adequacy of the financial structure of a business. Nevertheless, we have no rules or regulations about this particular aspect of lending beyond injunctions to our officers not to be over-concerned with security, to be more concerned with management and business prospects, and not to shrink from risk if a venture seems worthwhile.

These two considerations, the availability of financing elsewhere and the investment in a business, are basically the only ones laid down for us to follow. We have no rules governing the credit judgment of our officers other than that a proposal submitted to us should represent a sound proposition for the applicant and ourselves. There are no rules about the amount of investment in the business compared to our loan, no regulations about what earnings record an applicant must submit, no requirements about what working capital his business must have, or indeed about any other aspect of an applicant's financial position. We make many loans that are considered under-secured, and to businesses with a deficiency of working capital, and to businesses with very little equity investment.

We have no rules about the structure of a borrowing business. We extend financing to incorporated companies, to partnerships, to individuals in business for themselves, to farmers, to professional people, in short to anyone who has a business.

We have no rules about the sort of need or program with which our loan might assist. Most of the loans are used for expansion in buildings and machinery. Last year about 65% of the programmes were for this sort of thing, but our loans also financed changes of ownership, assisted with working capital needs and so on. A very small percentage went to refinance existing term debts of various sorts. For example, something under 1 % went to retire liens on equipment.

We have no rules about the size of a loan, although most of our loans naturally do go to small businesses. We make loans for less than $5,000 and we have made several--three, I think--for as much as $5 million. Half our loans are under $25,000, and 95% of our loans are under $100,000. In the past year, out of 9,800 loans approved during the year, only 185 were over $200,000. The average loan so far this year is $39,000.

One could hardly be more directed towards the field of small business than is the Industrial Development Bank. In fact, I very much doubt whether many agencies catering to the broad term financing needs of businesses operate with such a low average loan.

So much for our function. Now, by what means do we carry it out, and what success have we had?

For the money we lend, we have had, first, that invested in our shares which are held by the Bank of Canada. These now amount to $75 million. Secondly, we have our reserve fund representing our accumulated profits. This now totals over $33 million. Most of our money, however, has come from the sale of debentures to the Bank of Canada. These are now approximately $915 million. This means that about 88% of the money we lend, we ourselves borrow and pay interest on it. Interest on these debentures is paid by the I.D.B. at something above the corresponding rate on Canadian Government bonds. The rates of interest on our outstanding debentures at present range from about 6 1/2% to 9 1/2% .

We now have approximately 1,400 employees, 71 branch offices from coast to coast, five regional offices, and the Chief General Manager's office in Montreal.

For many years, the bank has been strongly regionalized into five regions-British Columbia, Prairie and Northern, Ontario, Quebec and Atlantic. In each region, the branches report to a regional general manager, who, with supervisors, assistant supervisors and other staff, is located in the region for which he is responsible, and so is in close touch with the local business scene, and with local needs.

In Ontario we have twenty branches and a regional office in Toronto. We also have a Northern Ontario District Office at Sault Ste. Marie.

Very wide authority to deal with credit applications and approve loans is delegated to branch and regional offices. Approximately 60% of all loans are authorized at the branches themselves without any prior reference to a higher authority. Over 37% are approved at the regional offices. Only 3 % or less--these being the larger loans--are referred to our office in Montreal for approval or for reference to the board of directors.

No region is restricted as to funds available for loans. A loan made in one part of the country does not limit, reduce or affect in any way the funds available for lending elsewhere. Apart from concern as to the policy matters I discussed earlier such as those having to do with the availability to applicants of funds from other sources, and apart, of course, from the larger credit proposals submitted to it for consideration, the office in Montreal follows the work of the regions and branches only to ensure that they operate efficiently, that they lose no opportunity to acquaint businessmen with the services we offer, that no reasonable opportunity for extending help is overlooked, and that they do all possible to serve small businessmen in their area. Our two goals are efficiency and effectiveness.

Since the bank's formation it has approved close to 60,000 loans to 44,000 businesses in the total amount of approximately $2,800,000,000, of which 34,000 loans for one and a half billion dollars were approved id the past five years. In fact, in the past five years we have opened more branches, approved more loans, and loaned more money than in the first twenty-five years taken all together. More than half of the money the bank has advanced has by now been repaid, and we now have 25,000 borrowers on our books with outstanding loan balances of just over one billion dollars. In Ontario, we have assisted about 12,500 businesses with loan approvals of just under $800,000,000. Last year, we approved 2,400 loans in the province for over $100,000,000 and currently we have close to $275,000,000 out in loans to over 6,000 businesses in Ontario.

From the beginning, the bank has tried to pay its own way, and covered all its expenses out of its own revenues. We have paid interest on our debentures, salaries, the cost of setting up branches, and all other capital and operating costs. The bank has covered any losses it has incurred and it has set aside ample reserves to cover future losses; and it has still been able to show a small profit every year, and these have, of course, accumulated in a reserve fund to augment funds available for lending to other businesses.

The evolution of the bank has emphasized assistance in smaller business centres, in Ontario as well as elsewhere, and also in the remote parts of the country. In the past five years, we have more than doubled the number of our branch offices, to reach out into the smaller communities. As compared with thirty-one branches in 1969, established in the first twenty-five years of the bank's history, in the last five years we have added thirty-six more. We now have offices in places like Corner Brook, Sydney, Rimouski, SeptIles, Chicoutimi, Rouyn, Owen Sound, Timmins, Kenora, Brandon, Grande Prairie, Red Deer, Yellowknife, Whitehorse, Cranbrook, Terrace and Campbell River. Of the loans approved last year, one-third were made at branches that did not exist five years ago.

In those areas, the impact of the bank has really been quite significant. We even have loans in the Arctic at places like Inuvik, Tuktoyaktuk, Frobisher and Pangnirtung. In Yukon we have made one loan for every 75 people, and in the Northwest Territories, one loan for every 175 people. Branch offices like the one in Prince George in Northern B.C. and Grande Prairie in Northern Alberta are actually among the largest and most important in the bank.

Our branches carry out a very heavy programme of what we call "advertised visits" to smaller communities in their areas. For these visits, an advertisement is placed in the local newspaper announcing that an officer of the bank will be in the community on a certain date to receive enquiries from businessmen seeking assistance. About one-fifth of our loans result from these advertised visits.

In some parts of the country, such as Northern Ontario and Atlantic Provinces, we have used a mobile office in a van which travels from one small town to another to receive enquiries and discuss loan proposals.

In the course of a year we are, of course, in touch with a great many businessmen, not all of whom submit or are able to submit a formal application. Last year we received enquiries from 31,000 businesses of whom 12,000 submitted formal applications, and of these 83 % or nearly 10,000 were approved.

Since we are supposed to lend only when someone else will not do so, it stands to reason that we have had losses. All told, we have written off around $12 million.

Some people have tried to derive from this a measure of our loss experience by relating this figure of actual write-offs to such simple yardsticks as loans outstanding or authorized to date. This is not possible. For one thing, it is our policy not to write-off anything on a loan until all resources for the repayment or recovery have been exhausted. We do not write anything off just because it looks bad. We do not write anything off until, if liquidation is resorted to, all our security has been realized upon, so that we know exactly how much our loss is. Further, the bank usually exercises a good deal of patience when a loan goes into default while a solution to a borrower's problem is sought. A great deal of time may pass before the bank finally feels obliged to take action under its loan contract and realize upon its security, and then perhaps write-off part of the loan balance. Generally it takes three or four years for the character of the loans made in any one year to reveal itself, and it may be another three or four years or more before an unsuccessful loan reaches the point of our having to realize upon our security and having to write-off some part of our advance. This means that most of the amounts written off up to the present time arose from loans made many years ago. When one considers that, due to our growth in the past few years, a large proportion of our outstanding loans is of recent origin, it can be seen that to express the actual dollars that have been written off to date in total as a percentage of presently outstanding loans, as some people have done, is really a meaningless piece of arithmetic.

I should say that our loss ratio is probably around 1 1/4% to 1 1/2%, and it may trend slightly higher. It is perhaps interesting to recall that when Mr. Graham Towers, former Governor of the Bank of Canada, and one of the "Fathers of the I.D.B." was asked in 1944 by the Common's Banking Committee what he thought the losses of the proposed bank would be, he suggested 132%!

In terms of numbers, 25% or more, and at some times and in some regions 40% or so, of our loans are likely to be in trouble at one time or another, and 3 or 4% probably result in a write-off either wholly or in part.

Of course, there is no pleasure or cause for pride in a write-off, although it sometimes seems to be suggested that we should measure our success as an industrial development bank by the amount of money we lose. If we lose money, which we can afford to do, the borrower almost certainly loses all he has in the business, which he usually cannot afford to do. We try to avoid losses and write-offs by spending our money, rather, on careful prior investigation of loan proposals, and on careful administration after a loan is made. In this sense, a good part of the money spent on our operations in administration and so on might well be regarded as "lost" since it has been expended in order to avoid a write-off, both by ourselves and by our borrower. We are constantly trying to improve our contacts with small businessmen, and our responsiveness to their needs. In the past few years we have made special efforts to reduce the time taken to process a loan application by revising and streamlining our procedures, and by transferring almost complete authority to make loans to the branches and regional offices. As a result of the measures we have taken and our concentration on these matters, we have in the past five years or so, reduced the average time for processing a loan application from forty-five days to thirteen days.

Also, in order to improve still further our responsiveness to the needs of small business, the programme of advertised visits to smaller communities, which I have referred to previously has been greatly increased. In fiscal 1969, representatives from our branches made 980 advertised visits to smaller communities. In the past year, they made about 5,300 such visits. This means that each week our branch officers are out visiting a hundred small towns across the country.

Recently, we have embarked on some new initiatives. Two years ago, in order to supplement the help we give to businesses through financial assistance, we set up a new department-Advisory Services-intended to guide small businessmen in sound management practices. This department holds several hundred seminars per year in small centres to instruct businessmen in good management principles; these have been enormously successful and have been attended by thousands of businessmen. I may say that these are conducted strictly without reference to our loan activities, and business leaders, such as bank managers, chartered accountants and chambers of commerce work with our own people in operating these seminars.

This department also publishes a "Small Business News Letter" giving information and news items of interest to small businessmen. It also writes and publishes a series of pamphlets entitled "Minding Your Own Business" and "Votre Affaire, C'est Notre Affaire" on all sorts of management problems. These pamphlets have been extremely popular, and we have distributed over 500,000 copies not only to business people in Canada, but also to other financial institutions, and to a great many countries and organizations overseas.

The Industrial Development Bank was one of the first development banks in the world. Its experience has been drawn upon by many countries, often through the World Bank or through the Canadian International Development Agency, to train the personnel of other development banks. We have trained well over one hundred bank officials from fifty countries in this way. We have also sent our officers abroad on loan to other development banks to help train their personnel or guide them in sound lending, or organizational principles. The Jamaica Development Bank and the Caribbean Development Bank actually resulted directly from studies that were made for the World Bank and the United Nations by my predecessor, Mr. A. N. H. James.

Under legislation that has just been passed, the I.D.B. is to provide the basis for a new bank to be known as the Federal Business Development Bank which will report to Parliament through the Minister of Industry, Trade and Commerce. Like the I.D.B., it will concentrate on helping small businesses. It will continue the financing activities of the I.D.B. as a supplement to other lenders. It will seek to develop an ever more flexible approach to the conditions and forms in which its financial assistance is extended. It is expected that particularly in the area of equity financing, it will seek opportunities for extending assistance of this type for the establishment of new businesses or to help existing ones.

The new bank will also have very much enlarged responsibilities in the field of management services. In addition to the work that the I.D.B. has been doing in this area, which will be continued, the new bank will be active in the establishment of educational courses on small business management. It will, through the network of branches already established, provide the owners of small enterprises with information on the many governmental programmes designed to assist them, and it will absorb and extend the excellent counselling service which has been heretofore carried on by the Department of Industry, Trade and Commerce under the name of Counselling Assistance for Small Enterprises, known as CASE.

The new bank will have its own board of directors and president. It will not, as the I.D.B. has done, obtain funds by selling shares and debentures to the Bank of Canada. It will, instead, obtain equity or debenture funds from the Federal Government. The greatly expanded activities in management services will, however, apart from such revenues as they generate, be financed separately through annual Parliamentary appropriations on the basis of budgets submitted by the bank.

The regional character developed by the I.D.B. will, in the new bank, be strengthened by the setting up of local advisory councils. With thirty-one years experience in the field of assisting small businesses behind us, we in the I.D.B. look forward to the challenges and opportunities for enlarged service which will open up in the Federal Business Development Bank.

The official thanks of the meeting were expressed by Mr. James H. Joyce, Chairman of the Ontario Development Corporation, and a Past President of The Empire Club of Canada.