At last an admission from the banks that their loose lending policy is the cause of some of agricultures indebtedness. A change in policy will require loans to be approved on earning capacity, which will enable the farm to service the debt, ahead of a reliance on capital growth to ensure security of the loans.
The numbers of at risk customers have been identified, and they will be encouraged to pay down as much debt as they can, under these times of favourable commodity prices. These new rules should change the attitudes of farmers from a capital growth focus, to being profit driven which will be a much more sustainable system for all in agriculture.
The country's largest rural lender has sharpened its loan policy to tackle the sector's indebtedness reports Rural News. ANZ Bank, which holds 40% of rural loans, is no longer lending money to farmers on asset valuation but on earning capacity. Loans for dairy conversions have been cut back and all loans are signed off by two bank officials. Speaking at the SIDE 2011 conference at Lincoln last week, Wilks said too many conversion loans "were done on the back of cigarette packets; there were too many cost overruns."
Concerns about ballooning rural debt prompted the bank to review its dairy loan book in 2009. It found 1100 farmers carrying $6 billion debt. The concern was about 100 farmers in "dire circumstances" struggling to service interest bills of 8% at a milk payout of $5.40/kgMS. Another 370 farmers were found in the "high risk category". Wilks says based on ANZ's market share, its figures translate into 250 farmers in dire situations throughout the industry. Another 1000 are high risk. "The farmers in trouble made excessive use of leverage and over-reliance on capital gains."
"The farming sector is over-capitalised and over-indebted," he told delegates. "The world will not lend us money to grow our debt 4-5 times faster than our economy." The good news is that the industry "dodged the bullet", he says. If the payout had remained at $4.50/kgMS, the country would have been in trouble. But farmers are not the only guilty party. The banks also played a role by watering down loan terms and conditions to win business. Borrowers took comfort in banks' readiness to lend them money. Inexperienced customer managers were vouching for their farmer clients' ability to repay.
Wilks says banks were also wary of would-be borrowers taking the attitude that if a loan was not approved "the bank down the road would take it." The bank now has corporate bankers managing corporate-style loans. And it stays in touch with farmers to ensure their businesses are going well.
Loan sizes depend on underlying earning capacity and ability to service, says Wilks. "We are open for business but we're now conducting business in a responsible way," he says. "We want to prevent problems repeating in the long term interest of banks, employees and customers."
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.