Higher risks at small banks

THE number of small banks is dwindling. Wimbledon and South West Finance went into administration last week. National Guardian suffered the same fate in February 1992.

Both collapses have left investors feeling sorely aggrieved and, in many cases, out of pocket.

Small banks frequently offer high rates of interest to investors. But these are financed by high loan rates to borrowers who are often unable to borrow from high-street lenders.

If you invest with a small bank, you have to remember that higher reward inevitably means higher risk. If too many borrowers default on the loans, the whole empire comes crashing down.

Hampshire Trust is a private bank that pays depositors higher investment rates and lends money at higher rates to borrowers. However, it is adamant that it has got its investment and lending policy right.

Hampshire offers a six- month notice account, which pays investors 5.81 per cent net on balances of pounds 500 and above.

According to Chase de Vere, the best buys from the high street include a six-month notice account from the Portman Building Society, which pays 4.5 per cent on deposits of pounds 500. If you have pounds 100,000 to invest, the Bristol & West six-month account pays 5.55 per cent - still less than Hampshire.

Stephen Hunter, Hampshire's company secretary, says: 'Part of the reason why our rates are so high is that we do not advertise. It is also keeping the overheads as tight as we can. The senior management are all here, and we only operate from one office in Fareham, Hampshire.'

Mr Hunter says the number of depositors 'runs over the thousands', and the vast majority are recommended by existing depositors. For borrowers, Hampshire's base rate for loans is 13.5 per cent. The loans are arranged through introducing brokers.

Mr Hunter says that Hampshire is not the place for standard residential mortgages - because of the high interest rate. The bank will, however, look at proposals 'that other banks might not'. Mr Hunter says the bank has the specialist expertise and necessary control to be able to lend in this area.

Hampshire's loan book is about pounds 10m. However, Mr Hunter admits that there have been bad debts. 'Any bank that says that it has not suffered them is not telling the truth,' he says. The company accounts for the year ended April 1993 show a deficit of pounds 404,000. The year before, it was pounds 987,000. Mr Hunter says that as for other banks they were difficult times. 'But now things are looking a lot more robust.'