But beyond any such considerations is the fact that a Government lending program such as that administered by the Small Business Administration is in itself a type of service much in the same manner as other services made available by the Government to agriculture or to business through activities of the Department of Commerce and other functions of Government, the Interior Department.

And to the extent that we carry on certain activities such as counseling, there is no fee charged, no remuneration. And even in connection with the loans declined there is usually an element of this counseling that is of benefit to the borrower and which does not produce any income for us.

Now, it is not possible for a Government agency to act as independently as it is for a private institution in connection with its applicants. We must consider applications for loans in some instances even though we know at the time of our early discussions or we feel at the time that it is unlikely that we will be able to make a loan.

But it is our desire to try to assist the borrower so we do have to go ahead and process loan applications, all of which brings in no revenue. There is a full discussion of this in the material that I would like to insert in the record at this point which also has a bearing on the article which was published in the Wall Street Journal to which you made reference at one time.

Senator PROXMIRE. Without objection, that material will be printed in the record at this point.

(The statement referred to follows:)

COSTS OF SBA LENDING PROGRAMS

In appraising the actual and estimated losses resulting from the revolving fund lending activities, several factors must be borne in mind:

1. A portion of the deficit is attributable to the disaster loan program. By law the agency is restricted to charging a maximum interest rate of 3 percent. On the funds disbursed for such loans, interest is being paid to the Treasury Department in 1959 at 2% percent (and in 1958 was 34 percent). At the current year rate, there exists a spread of only five-eighths of 1 percent to cover administrative expenses and other costs and an allowance for estimated losses. Obviously, the disaster loan program cannot be a profit producing activity.

2. With respect to business loans, the current interest expense rate of 2 percent leaves a margin on only about 3 percent to cover the costs of processing new applications, closing and disbursing new loans, and allowance for losses on such new loans, the cost of servicing all outstanding loans, pro rata share of overhead, and the rendering of financial counseling assistance to small business firms.

As a Government agency charged with the responsibility of providing financial assistance which is not otherwise available to small firms, the agency is in effect required to provide services greater than those customarily furnished in the granting of credit. Financial counseling is extended to applicants and borrowers to help them with their management problems. In many instances as a result of the agency's efforts, banks which originally declined the applications subsequently agree to make the loans. In other instances, applicants are assisted in solving their problems through other means than loans. These and similar activities are of real benefit to small business and are definitely contemplated by the Congress to be performed, but do not result in income-producing assets to offset the costs chargeable to the revolving fund.

3. In contrast to a private financing institution, SBA is required to accept and process all applications offered to it even though on cursory review many of such applications do not appear to present any basis for a loan. In the case of these and other applications declined, equal if not greater efforts than on approved loans are expended by the agency in an attempt either to find a basis for a loan or to offer tangible solutions to the applicant's financial problems. During the

current fiscal year 58 percent of the applications processed have been approved. Thus, 42 percent of the cases require the expenditure of administrative expense funds for processing but do not result in income-producing assets.

4. Further, in accepting applications, SBA is not dealing with "customers" as is a bank in most cases, and accordingly does not have the benefit of background data accumulated over a period of years. Thus, it is necessary for SBA to assemble a complete credit record to permit the required review essential in the lending of taxpayer's funds. This obviously requires increased efforts and costs over the average for private financing institutions. Also, term loans are more costly to process and analyze than 90 day (or other short maturity) loans more commonly handled by commercial banks. Further, many applicants are located at a considerable distance from an SBA office which increases the out-of-pocket travel expense as well as the time of personnel in inspecting and appraising collateral.

5. The business loans approved to date have averaged about $40,000 for the SBA share. It is probably as difficult and costly to process, close, and service loans of this size as it would be to handle loans averaging 3 to 4 times this size and producing a correspondingly larger income.

6. From the standpoint of a business-type operation, the actual and projected deficit properly reflects a charge for estimated future losses on loans made. However, in considering figures cited as the losses on a Government lending program, the usual inference is that such losses represent a realized loss, or an "out-ofpocket" expenditure of Government funds in excess of income actually received. In this respect the figures can be misleading. The projected deficit of $27 million as of June 30, 1959, includes a cumulative charge of $12 million as an allowance for losses. Realized losses through March 31, 1959, amounted to only $719,000.

7. The report states that the revolving fund will be capitalized at approximately $700 million in 1960 (the exact figure would be $690 million), and the implication is that this full amount would be invested in interest-bearing assets. The budget projections estimate that as of June 30, 1960, interest-bearing loans and investments outstanding will total only $563.6 million, comprised of:

Business loans (average interest rate of approximately 5 percent)
Disaster loans (interest rate of 3 percent).

Debentures of small business investment companies (interest rate of
5 percent).

Loans to small business investment companies (interest rate of 5 percent).

Loans to State and local development companies (interest rates of 5 and 52 percent, respectively) -

Million

$407.2

61.1

25.0

51.9

18.4

In addition, undisbursed loan authorizations and commitments chargeable against the Fund are estimated at $110.8 million (including deferred participation business loans disbursed solely by banks at 20 percent of the SBA share thereof). Income is derived from such deferred participation loans on a sliding scale (from one-half of 1 percent to 1 percent) depending on the percentage of the loan which SBA is obligated to purchase. The amount of such income is relatively nominal and is estimated at approximately $400,000 in 1960.

Senator PROXMIRE. I am not sure that I understood you correctly. It would seem to me that an operation in the red would be inevitable in the coming year unless the Congress increases the 52-percent ceiling. At least if not inevitable, quite likely.

Mr. BARNES. I think that is right.

Senator PROXMIRE. Did I understand you to say that you take no position on this? That this is a decision for Congress? Or did you make a recommendation that in your judgment the interest rate should be increased?

Mr. BARNES. I made the recommendation last year, at the time this law was adopted, and I will repeat that recommendation now, that I think 52 percent is too low for a business loan program where in most sections of the country banks are charging 6 percent and more. There is no question of doubt in my mind that it tends to attract

some borrowers to our program even though we do work with the banks and do not provide financing where they will.

We are going to step up that phase of our program. We are going to see if we can urge additional banks to set up term lending programs and make referrals. But it is difficult to refer people to private banking if our rate is fixed at 52 percent and they can get 6 to 61⁄2 to 7 percent on the funds that they loan.

It does not make sense for a private banker to take part in this program unless he really wants to help this particular customer, wants to keep this customer.

Senator PROXMIRE. The situation has changed quite drastically since last year in interest rates.

Mr. BARNES. Yes, sir.

Senator PROXMIRE. Did you have any specific ceiling in mind? Did you think it should be established by formula as the cost of money is established for you? Or did you have any notion other than that the ceiling should be increased?"

Mr. BARNES. My personal view is that the way Congress enacted this law originally is the proper way for it, the system, to work. A loan policy board should set the interest rates, and there should be flexibility in the setting of rates to match what else is done in the Treasury or the Federal Reserve Board or the money market generally.

Senator PROXMIRE. The housing program, and so on?

Mr. BARNES. Yes. The purposes of the loan policy board were to enable this program to be operated and geared in with the other activities of the Government. When the setting of interest rates was taken away from the loan policy board, then it became inflexible.

Senator PROXMIRE. Then what you are saying is that you would prefer to have the ceiling taken off completely?

Mr. BARNES. Yes, sir.

Senator PROXMIRE. And discretion as to the level, to be lodged in the loan policy committee and not set by the Congress by statute? Mr. BARNES. Yes, sir. By the loan policy board, which has representatives from the Treasury Department and from the Commerce Department on it.

I mean I believe that is the best system, and I do not believe we had any trouble when we had that system. We had few complaints ever about interest.

Senator PROXMIRE. Did I detect in what you said a feeling that because the interest rates are now lower than commercial banks that you have people coming to use the small business opportunities who would not ordinarily do so? Who would not need to do so except that they can get a better bargain and they can get cheaper money that way? Mr. BARNES. I believe that that is right. I cannot prove that very well, because in each case we have a refusal from a private bank to take the loan, and this includes their bank of account.

But I think it is just human nature if you can get 512 percent rate from a Government lending program and a bank charges 6 or 61% percent that you will make every effort to get the lower rate. And the bank is placed in an anomalous position if the borrower says to them, "We want you to give us a turndown," or, "We want you to agree to a participation loan." It is not the kind

Senator PROXMIRE. In a period of tight money when banks are pretty well loaned up and they are having trouble making loans anyway, as you say, it is human nature if a good customer comes in who is on good personal terms with the bank, that they accommodate him, that they give him a turndown.

Mr. BARNES. Yes, sir.

Senator PROXMIRE. If it will save him some money and if they keep his good will.

Mr. BARNES. But, as I say, this is something that I cannot prove because it is not the type of thing that appears in the record. All we get is the formal action of the bank or the bankers.

If I may finish this section of my statement

Senator PROXMIRE. Yes. Go right ahead.

Mr. BARNES. In addition, 325 business loans, with an unpaid principal balance of $10.7 million, were delinquent in excess of 60 days. The agency analyzes each delinquent loan in a sympathetic manner, with a view toward assisting the borrower in overcoming his difficulties and at the same time protecting the Government's investment. Also included in the statement I inserted in the record was a statement about the amount of reserves that we maintain for losses, which contributes to our loss figure. I indicated that we anticipated losses on our present program of something over $5 million, but my recollection is that the loss figure which we actually deduct and charge against our program as a bookkeeping matter is more than twice that

amount.

There is some $12 million which we have set up as a reserve for losses, and it is very proper to do that.

I think if there were a change in the economy that made a number of these loans go delinquent and we took losses, we would be well justified to have an ample figure in the reserves.

But this means that there is some $7 million that we have charged against us as an operating expense which in fact is beyond the actual needs as shown by our experience under the program.

I make no complaint about this. I think it is proper to have this reserve maintained.

Senator PROXMIRE. It seems to me on this whole interest rate problem there is a very understandable feeling you have that the SBA should not compete, certainly should not compete unfairly, with commercial banks. The Federal Reserve Bulletin made a study in April 1959-I have the statistics in front of me-in which they show that borrowers who have assets of less than $50,000 pay average interest rates of about 10 percent on 1- to 3-year maturities.

It is perfectly obvious that the SBA-at least it is obvious to meshould not go nearly that high. That is perhaps why Congress is a little reluctant to take the ceiling off completely. If we get into this situation with the idea that we should have comparable interest rates there might be loans that would go as high as an average of 9.96 percent, which is what the loans were to some small businesses.

Mr. BARNES. Well, sir, even when there was no limitation on the amount of interest that we could charge, the loan policy board never fixed a rate that would even approach the figures that you have given. Senator PROXMIRE. Interest rates were much lower then though, were they not?

Mr. BARNES. Yes, sir, they were, but the problem occurs somewhat as this: In a loan in which there is inventory pledged or in which accounts receivable are taken as security, there is considerably more than is done than in a normal-term loan.

This means that there must be a constant release of collateral and the substitution of collateral, and there are fees charged by commercial banks for this type of work which might account for a 10percent rate.

Well, the borrowers that we see are in many instances people who have been using factors and their rates may be around 15 to 18 percent, which may be in itself a reasonable rate for the risk that may be involved in the particular situation. When such a borrower comes to us and seeks a loan to refinance, to add construction and to refinance some of his obligations, if we are limited to a 52-percent rate this to a certain extent is unreasonable. And even though we would allow a bank that participated to add a fee for the handling of that collateral which we are willing to do if the bank does an unusual amount of work, this still sets the effective rate so low as to be not a good parallel with commercial banking.

The borrower is quite willing in many of the situations that you mentioned and I daresay that that is most of the kind that is involved in the 10-percent rate-and the borrower would prefer to pay 8- to 10-percent effective rate for a commercial bank rather than 15 to 18 percent if he has to pledge his accounts receivable with a factor. There is nothing that we can do about it as long as the rate is fixed. Ours is an inelastic situation and does not encourage banks to take part with us in that type of lending which is a very important type for the small borrower. He finds it necessary to pledge his accounts receivable to finance his inventory.

May I continue?

Senator PROXMIRE. By all means. I have been interrupting a great deal.

Mr. BARNES. That is all right.

Senator PROXMIRE. I did not mean to detain you. I realize you have a long statement.

MANAGEMENT AND RESEARCH ASSISTANCE

Mr. BARNES. The SBA management and research assistance programs continue as a growing source of practical information for owners and managers of small concerns. As the members of this committee may know, I have established a new Office of Management and Research Assistance so that this important function of the agency can efficiently be developed to its greatest potentiality. I know of no program of this agency which can contribute more to strengthen small business and do it at less cost than management and research assistance programs.

Section 602 of the Small Business Investment Act added a section to the Small Business Act, section 7(d), which provides an entirely new program for the development and dissemination of management and research information to the small businesses. SBA is authorized to make grants to State agencies, State development corporations, colleges and universities for studies and research concerning the managing, financing and operating of small business concerns.

The