THE weighty burden of penalty interest rate charges on Australia's ballooning rural debt problem is becoming a spotlight issue for the financially-stressed farm sector.
"When they need their banks the most, they get them the least".
Penalty rates are an "absurd financial contingency that only make a bad situation much worse" say critics of the harsh lending policy.
Banks are under increasing pressure to impose a moratorium on penalty charges for rural enterprises and farms caught by the protracted impact of debt, drought and the continuing fallout from the 2011 suspension of live cattle exports to Indonesia.
While the official Reserve Bank of Australia cash lending rate remains at historic lows of 2.5 per cent, penalty rates on farm mortgages can typically take the interest burden well above 12pc.
Penalty rates can also apply to outstanding debts with farm service suppliers.
"Just as the farmer or business operator is struggling to pay their loan payments, the banks penalises them by rapidly and quite catastrophically increasing the level of interest rate," said harsh critic of the lenders and Queensland Senator Barry O'Sullivan.
"This only makes a bad situation worse and in some cases is singularly responsible for putting an economic recovery out of reach for borrowers."
Although banks are downplaying the extent of the nation's farm debt blow-out, the reality of the problem hit home in southern Queensland this week with prominent rural debt campaigner Rowell Walton himself becoming a victim of a bank foreclosure.
Borrowings worth about $13m in drought years prior to 2008 have blown out to debts totalling $30m for Mr Walton, compounded by an estimated $7.5m crop loss to flooding in 2010, and further borrowings to re-plant the next season's crop.
The Walton family's five-property, 12,000-hectare cropping and livetock enterprise based on "Yullumbilla" at Condamine was put in control of receivers by the Australian and New Zealand (ANZ) Banking Group last weekend.
Mr Walton is chairman of the national rural debt roundtable working group set up, with support from the federal Labor Government, to highlight the financial risks piling up on many farms after the past decade's drought.
Liberal bank lending policies prior to the global financial crisis were followed by tough new debt and cashflow rules, including tougher risk penalties, which have complicated landholders debt pressures and farm equity positions.
ANZ acquired the Walton family's debt when it bought Landmark's loan book for $2.4 billion in early 2010 - a national deal which put the bank at the top of the farm lending table in Australia.
Mr Walton said his situation was similar to that of a number of people he personally knew of, and another multi-enterprise receivership in his district last month.
He conceded ANZ had been "quite patient" with him, but rules applying in lending markets today were a complete turnaround to the situation lenders had promoted when they were heavily focused on land value capital growth prior to 2008.
The Liberal-National's Senator O'Sullivan is seeking a freeze on use of penalty payments, describing the current lending policies as "an absurd financial contingency".
"If necessary, I will explore ways to introduce legislation that pushes for regulatory arrangements that prevent banks from applying these insidious conditions," he said.
"Personally, I don't think this provision is in the interests of the bank because it will guarantee the collapse of the contractual arrangements and comes at a time when people are facing one of their most vulnerable challenges where everything they own in life is on the line.
"When they need their banks the most, they get them the least.
The Australian Bankers Association said banks already had a long history of working with the farming sector and provided financial hardship assistance to customers who may be experiencing financial difficulties.
Banks worked with agribusiness customers to assist them manage their businesses and the volatility of cash flows which may be the result of prolonged drought, natural disasters, or changes in trade conditions.
Mr Walton said his experience with other farmers facing penalty payments and his own debt troubles extreme rate hikes were "a sign that the banks want you to get out right away".
"Unfortunately selling up has not been an option for most landholders in the past few years - very few sales have been taking place," he said.Author : ANDREW MARSHALLSource : The Land
Meg, I am very exposed to this current drought, I paid 9K last month for agistment for 2012's weaners. This has been the case for the last 12 months. At the current prices my rung-out steers will make me $30 premium after agistment deduction over if i had sold them straight after weaning. I gambled, currently i will lose. Have you ever stopped to think about the reason for debt woes - Borrowing too much money?? Australians first, Banks make their sliding scale risk profile position very clear, this usually happens after you have breached contract conditions. Pay your debts, find a way..Report
bring on an Agricultural Bank controlled by government with realistic interest rates. Totally agree with Meg, the environment we operate in now is UNSUSTAINABLE - we are all vulnerable to our crops being 'wiped' out from flood/drought/frost..(all uninsurable events) and also being paid prices below the cost of production....crazy business. also question the integrity of the 'bankers association' who underplay the level of rural debt.Report
The "money" we all borrow from banks is created out of thin air. All money in a modern economy except the tiny portion that is notes and coins is created from nothing and loaned into existence as a debt by private banks. Individuals and Governments are victims of this confidence trick. This is the policy of money monopoly and makes those who run the Ponzi scheme very rich and powerful. The interest rate "penalties" are a scandal. If the public was not hypnotized by the money trick they could change the policy any time but they vote for more of the same and then complain.Report
The interest rate should reflect the risk profile. The size of the interest rate should be made clear to the farmer by the bank at the time of the loan not changed as a result of the bank getting nervous about their decision to lend. When the farmer asks for more lending that is when the bank should reassess the risk and the interest rate on the new loan not the extension of the existing loan.Remember banks are in the risk business they should not be absolved from their decisions to lend just like the farmer is not absolved from the loan they enter into. Penalty rates are too one sided.Report
Pete, I hope you are never in a position where you lose a crop to cyclone or drought...but if you did, you might learn a little about empathy and compassion for farmers...who are forced to accept a price for product, whether or not it is realistic and covers cost of production...that scenario is UNSUSTAINABLE! That's the reality...until that issue is addressed, either by realistic interest rates and terms or by introducing a better payment system and rate...then this country will shortly learn what it is like to starve! WAKE UP!Report
Once again the board of directors put the returns to shareholders above all else. Profit at all costs ,well ask them to chose better a steak and a bag of money to eat and Penalty rates only come into effect when you default on a payment? Simple resolution to the problem - Don't Default. We pay penalties as symptom of the risk profile of our business. If we paid our loans off monthly like a traditional mortgage then our interest rates would not be a 2% premium on home loan rates. As farmers we gamble, spotting money to a gambler is a risky position. I don't blame banks for chasing higher returns. They are protecting their interests.Report
Once again the board of directors put the returns to shareholders above all else. Profit at all costs ,well ask them to chose better a steak and a bag of money to eat and see what you answer is then .If all of our farmers are having a hard time due to climate change issues then shouldn't we then stop pouring millions of tonnes of co2 into the atmosphere through our coal exports . Dammed if we do dammed if we don't ,but eating is sort of important to humans.Report