Recently there has been a lot of publicity around the capital overlays. The crux is that, in many cases, lending in the rural sector has exceeded what farmers can afford and, therefore, isn’t earning the banks the right return for the risk they carry.
The Reserve Bank is right to want it rectified.
Put simply, there are two ways this can be achieved. Banks either adopt a long-term view and support the farmers who are making improvements and inroads into their debt, thus heading towards a reduction in risk and therefore an increase in bank return, or they increase interest rates to match the high level of risk they are enduring. That, however, does nothing to help remedy the farmers’ underlying issues.
Unfortunately, what we are seeing is more of the latter.
The banks have nearly seven years to implement the increased capital requirements, which, in theory, should mean gradual repricing over the same period.
What we are actually seeing, though, is bank leaders pushing their rural teams to either meet these return hurdles now or decline proposals to finance or refinance.
Not surprisingly, this is affecting farmers significantly.
At NZAB we are dealing with a lot of farmers – equating to about 3.2% of the market by share of debt. That gives us some good insights to what is going on.
Our primary objective in our engagements is to enhance the banking relationship by ensuring farmers have a plan, are reducing their risk and, as a result, getting what they rightfully deserve.
As a recent example, we have a client who has made significant improvements to the farming business over 18 months. They have gone from running at a loss to being in a position where they have been able to start repaying principal over a 20-year period – a great outcome for all parties involved.
There is a flip side to this success, however.
As part of the process we sat down with the bank and were told that for it to support the refinance of existing facilities, the margin would need to lift by 1%. Our client was already paying a high margin. That 1% reduced the cash available for principal repayments from $350,000 a year to $240,000. They no longer meet the criteria for long-term support as a result.
Evidently the bank is prioritising its own profit margins over the long-term rehabilitation of the farmer.
We have to ask ourselves “Is this fair and reasonable?”
I really feel for the front-line rural bankers.
They are people we work closely with and genuinely want the best for the farmers they deal with and will work diligently to identify the best deal they are authorised to offer.
This isn’t something they want to do, it’s a directive from the top – the banks’ leaders.
It’s easy to say the market will sort this out – just refinance to another bank.
Unfortunately, it’s not that simple any more.
The client mentioned above is a classic example of where their farming business has turned a corner but their trading history doesn’t yet reflect that in their financial accounts.
So, they’re stuck.
Their bank knows that and is taking advantage.
The question that keeps coming to mind through all of this is “Where’s the leadership?”
What do the rural banks want to be known for when we eventually get ourselves through this rural funding crisis?
The long-term stable partners who are there through thick and thin or the rogues who prioritise maximising their own bottom line at the expense of their loyal farming customers.
They will eventually need reigning in by regulators and governments.
Rural lending in New Zealand is a long game and loyalty is paramount.
Let’s hope the banks’ leaders start to open their eyes to this.
Who am I?
Scott Wishart is the managing director of brokerage and financial services firm NZAB.
