Farmers' lobby group Federated Farmers is calling for an independent inquiry into rural banking, saying farmers and rural communities deserve assurances their banks are operating in a fair and proper way.
The Commerce Commission is currently undertaking a market study into competition for personal banking services. However, this doesn't include rural or business banking.
"Farmers are doing it tough right now with rising costs, bad weather and falling payouts. The last thing they want to be worrying about is whether they’re getting a fair deal from their bank," says Federated Farmers Domestic Commerce and Competition spokesperson Richard McIntyre.
"Farmers and rural communities deserve to have the same assurances that their banking systems are operating in a fair and proper way, so Federated Farmers are calling for the Government to support an independent inquiry into rural banking."
Federated Farmers says it wants whoever forms the Government after the October 14 election to commission an independent inquiry into rural banking.
More farmers cite 'undue pressure' from banks
McIntyre says Federated Farmers' latest Banking Survey, done in May, featured a noticeable increase in the number of farmers who felt they'd come under undue pressure from their bank. This was up to 24% in May from 17% in November last year, the highest level since the survey began in 2015.
The survey also highlighted farmers' interest rates had increased sharply, with an average interest rate of 7.84% in May this year versus a low of 3.79% in May 2021. Their average overdraft interest rate was 10.07% in May this year versus a low of 6.28% in November 2021.
"Those numbers will only have increased since May as interest rates have continued to climb, economic conditions have quickly deteriorated, and many farmers have rolled off their fixed rates," says McIntyre.
"Kiwi farmers are currently carrying around $63 billion of debt, so a 4% increase in interest rates means there will be $2.5 billion fewer dollars circulating in our rural economy."
New Zealand's key rural lenders are ANZ, BNZ, Rabobank, ASB and Westpac. As of June 30, ANZ had total agriculture loans of $15.1 billion, BNZ $13.3 billion, Rabobank $12.9 billion, ASB $10.5 billion, and Westpac $9 billion. Next is Heartland Bank with $700 million.
McIntyre says farmers notice banks charge much higher interest rates for farm lending than home loans, and want to know "if higher interest rates for farmers are increasing banks' profitability or cross-subsidising a much more competitive market for home loans."
Banks' regulatory capital requirements are higher for rural lending than residential mortgage lending, a key factor in loan pricing and lending appetite. Rural loan pricing isn't as transparent as banks' mortgage rates. For rural lending banks publish a base rate and charge borrowers a margin on top of this designed to cover their risk and earn them a return on capital.
There are also discrepancies between the amount of capital the big four - ANZ, ASB, BNZ and Westpac are able to hold and other, smaller NZ owned banks. Kiwibank has no plans to enter the rural lending market and SBS Bank has been winding-down its rural lending portfolio, saying it can't get the return on capital the big four banks get, and it's not big enough to offer enough scale and expertise. SBS's former CEO Shaun Drylie told interest.co.nz in 2021 that the big four could be holding half the capital against agriculture lending as SBS due to favourable capital rules.
The RBNZ is phasing in new bank capital requirements that will help even the playing field between the big banks and the rest, but over several years, taking final shape in 2028.
Net-zero concerns
Meanwhile, McIntyre says an inquiry into rural banking could also look at branch closures and new bank environmental requirements.
He notes NZ banks' membership of the Net-Zero Banking Alliance (NZBA), either directly in BNZ's case, or via their parent groups in the case of ANZ, ASB, Rabobank and Westpac. The NZBA is industry-led, United Nations convened group of banks aiming to transition their lending and investment portfolios to net-zero emissions by 2050. (See more on the NZBA here and here).
McIntyre questions whether NZ banks' participation in such sustainability initiatives are reducing competition in agricultural banking.
Under the NZBA, banks have 2030 targets for reducing the level of emissions associated with lending. The agriculture sector contributes half NZ's emissions, according to the Ministry for the Environment's greenhouse gas inventory.
"This banking alliance raises some very serious questions about whether our banks are acting in a truly competitive manner, or if the joint commitment is effectively banks collaborating on a joint lending strategy," McIntyre says.
"Individual companies are free to put in place whatever requirements they like, but we have a real issue when the main competitors are collectively setting requirements that leave farmers without choices. There is potential for the Commerce Commission to consider what pre-competitive commitments banks in New Zealand can make before consumers rights to a competitive market place are compromised," McIntyre says.
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