Farmers say they’re paying much more than city-dwellers for loans

Wednesday, 16 October 2024

Many farmers have expressed anger at big banks’ apparent desire to lend to urban families to buy homes more than to lend to rural families to grow their farming businesses.

Submissions from farming groups to lawmakers over competition in the banking sector are pouring cold water on bank claims that competition for farm loans is fierce, and they’re not gouging farmers with unreasonably high interest rates.

Farmer and rural loan brokers’ submissions to the Finance & Expenditure Committee Regarding the Inquiry into Banking Competition, published on Wednesday, claim banks have a decreasing appetite for making farm loans.

And, they say, an increasing number of farmers are finding themselves “stranded”, with their current lender leaving them no negotiating power on borrowing rates.

The inquiry was launched after Federated Farmers reported growing unhappiness among farmers with banks, including their belief that banks favoured lending in towns on residential mortgages over productive rural loans.

In his submission Scott Wishart, the managing director of NABZ Agri Brokers, the largest agri-loan broker in the country, said the Reserve Bank Te Pūtea Matua’s higher capital requirements for banks making agri loans meant big banks preferred making “easier” and more profitable home loans in towns and cities.

“An agri loan needs to earn at least double the margin of a home loan to achieve the same level of return on equity,” he said.

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Wishart provided data to MPs showing that big banks’ home loans were now around $350 billion, compared to just $60b in agri loans.

Since 1998, the data showed, housing and personal loans had risen as a share of big bank lending from 56% to 65%, while agri loans had stayed at 11%.

While there was strong competition for higher-quality agri loans, Wishart said: “The decrease in risk appetite has seen a material increase in farmers who are ‘stranded’ with their current bank, meaning they are unable to be refinanced to another bank as long-term stress-testing metrics are not met.”

But big banks told MPs farmers were getting a good deal from them.

“While our agri customers may pay more than homeowners for lending (reflecting higher risk), agri consistently remains our lowest returning segment,” ANZ said.

ASB told MPs that farm loans were more expensive to service than home loans, adding: “We make a lower return on capital for rural lending than for all other lending products.”

Farm loans were riskier, ASB said.

“Over the past 10 years, rural losses have been more than double the losses of our home lending,” ASB said.

BNZ chief executive Dan Huggins told MPs: “BNZ’s recently reported agribusiness loan default rate, or agribusinesses that could no longer meet their repayment schedule, is approximately 1.3% (of total agribusiness loans), compared to home loan default rates of approximately 0.6%”

Like farmers, the banks pointed to the higher capital requirements for farm loans imposed by the Reserve Bank for part of the higher cost of agri loans.

Big banks’ lending on home loans has grown much faster than lending on farms, data shows.

ASB said: “On average around 0.5% of the interest rate of a housing loan and 1% of the interest rate of a business or rural loan will relate to the cost of providing the capital, though this will be higher for higher risk lending.”

Many farmers have written to MPs to express their frustration.

Deanna Walsh told MPs: “The difference in interest rates applied to business and rural lending vs that of residential lending is disproportionate to the risk that is touted as the reason for the difference.

“Lenders argue that the income stream is inconsistent or unreliable for a business or farm, however a salary or wage earner could just as easily lose their income tomorrow with a layoff or closure of their employer.”

Fonterra asked MPs to scrutinise the Reserve Bank’s capital requirements to decide whether they unfairly disadvantaged rural borrowers, raising the question of whether there would be enough funding for the next generation of farmers to buy farms.

Wishart feared there would be a dearth of lending to help farmers transition to become more sustainable.

Just as a challenger bank (Kiwibank) is growing lending faster than the big four Australian-owned banks in the small business market, a challenger bank is outgrowing them in the agri-lending sector. Rabobank chief executive Todd Charteris.

He called for Kiwibank to be given ring-fenced capital by the Government to launch into rural lending.

Just as Kiwibank is growing its small business lending faster than the big banks, so the challenger bank in the rural sector, Rabobank, is growing far faster than the big banks, and accounted for 41% of all new rural lending during the period January to June 2024.

Farmers told MPs they were concerned that banks were turning away from the agri sector as part of a strategy to lower the carbon emissions they financed.

Banks denied that was the case. They had been providing tools and incentives for farmers to reduce their emissions intensity, but said farmers’ customers, including Fonterra and global food company Nestlé, wanted more sustainable farming.

But farmers remain suspicious.

Submitter Daniel Walker told MPs: “It is grossly unfair for banks in some cases to be asking farmers to make disclosures about their carbon reducing plans when applying for loans.

“They do not ask borrowers for home mortgages for these sorts of disclosures.”

One business that was absolutely convinced banks’ climate ambitions were directing their lending was fuel retailer Waitomo, which has set itself the mission of providing lower-cost fuel to drivers and businesses.

It told MPs: “Put bluntly, because we sell hydrocarbons, the major banks are now debanking us.

“Competition and choice has been stripped out of the market, simply because of the product we sell, a product that Kiwis need to travel to school and work, to run their business, to get food to their tables.

“Funding availability and cost has deteriorated in recent years,” the business said.

“Work being done on ‘financed emissions’ by all major banks has resulted in only our incumbent bank being willing to continue funding us for term lending, regardless of price. This situation is well-known in the market and leaves our incumbent bank with a power imbalance in our relationship.

“Our recent funding extension resulted in a 20% interest rate increase (all else being equal) to gain certainty of funding,” it said.

“As well as the cost impact on our lending, our facilities are reducing by circa 10% per year for the tenor of the lending.”