RBNZ fires warning over rural debt levels

Another article warning that farm debt is getting to dangerous levels and this time by NZ's banking regulator. The Reserve Bank is warning that a sharp rise in recent years in agricultural debt levels may not be sustainable with some of the more highly leveraged farms, particularly in the dairy sector, having difficulty servicing debt. In its latest six-monthly Financial Stability Report, published on Wednesday, the Reserve Bank said there was evidence of increased use of farm overdraft facilities earlier in the year than was typically the case. Rural land prices were also likely to come under increasing pressure through the rest of 2009, with the market for farm sales currently "very thin". Despite some more positive trends in dairy prices recently, it appeared unlikely that commodity prices would return to the elevated levels of 2007/08 in the foreseeable future, the report said. Banks should be prepared for a situation in which farm incomes remained relatively low for an extended period. "Prompt action to carefully manage exposures to financially stressed farms is likely to be necessary."Loans to agriculture now accounted for 15% of total bank lending in NZ, up from 10% earlier this decade, the report said. At the same time, it also noted that default rates on agricultural lending were relatively low for now, with the major banks having indicated they intended to help rural borrowers through a period of weaker returns. In general, NZ's banks were facing an increasingly challenging operating environment. Measures of bank asset quality had deteriorated markedly in recent quarters as the effects of economic slowdown became clearer, the report said. In absolute terms, NZ's banks reported a three-fold increase in impaired assets between March and December last year, albeit from a "very low" starting point.