National Australia Bank’s headline grabbing offer not to charge penalty interest fees to farmers who can’t meet loan repayments is much more than just a slick public relations pitch.
In fact, it could be quite an expensive deal for the institution.
“NAB has made a significant decision, and it will actually cost the bank quite a bit of money,” says prominent West Australian rural financial counsellor, Chris Wheatcroft.
“It’s significant in financial terms because it potentially means a real saving to farmers struggling in drought who haven’t got cash flow at the moment.”
The bank – Australia’s biggest agribusiness lender –would forego maybe $50,000 or more a year on a $1 million loan, plus compounded interest costs over the extended term of the loan.
“It’s also significant because it sends a heartening message of support from the bank to customers feeling down-trodden by two, three or more years of drought,” he said.
NAB will definitely be foregoing profits in the course of making this statement of support for agriculture
“And it’s significant because the bank will have to make up the difference where loans are not performing as they were forecast to do.
“NAB will definitely be foregoing profits in the course of making this statement of support for agriculture.”
After attracting intense scrutiny of its farm sector default penalties at the banking industry Royal Commission, NAB managing director, Andrew Thorburn, this week announced “change needs to occur” on the issue of defaults on loans during drought.
Borrowers in government-declared drought areas in repayment arrears will no longer have to cop additional fees on top of their interest rates.
NAB will also cut rates on agribusiness loans via an interest offset-type arrangement if customers have farm management deposits.
Mr Wheatcroft, chief executive officer of WA’s Rural Financial Counselling Service, noted it was relatively unusual for banks to back away from demanding default penalties.
“It’s standard process to apply a penalty with loans which default – lenders aren’t normally willing to negotiate,” he said.
Inflexibility on default penalties partly related back to the global banking community’s Basel agreements on capital adequacy and market liquidity risk which required bankers to set aside extra funds in reserve to support non-performing or higher risk loans.
“I’m not sure how long they’ll sustain the decision, but I see this as a genuine attempt by NAB to show they are prepared to pay the cost involved in supporting customers in drought,” Mr Wheatcroft said.
The responsibility for rebuilding trust in what we do in regional Australia is ours
NAB’s recently appointed executive of regional and agribusiness banking, Julie Rynski, confirmed the bank accepted it must make that extra effort.
It had contributed to a loss of trust among rural people and businesses in recent years and it now wanted to prove its commitment to helping those who needed it.
“As a bank we acknowledge some of the things we have heard and seen in recent years contributed to a breakdown in trust, particularly in the bush,” she said.
“The responsibility for rebuilding trust in what we do in regional Australia is ours.
“If we’re to get there, we need to change. We must do better.”
Mr Wheatcroft believed other banks would follow NAB’s lead.
“It’s a very competitive market and I’d expect other banking executives will look at what they’ll need to do,” he said.
In fact, other banks say they are reviewing options for FMD offset accounts in light of NAB’s decision.
Both Rabobank and Westpac also insist they already do not charge penalty interest rates on loans in default due to drought (in drought-declared regions) and natural disasters.
As a bank specialising in the agricultural sector and used to dealing with conditions like drought, we have very good practices in place to support our clients
Rabobank claims penalty interest has only been charged in rare instances.
“As a bank specialising in the agricultural sector and used to dealing with conditions like drought and other adverse climatic circumstances around the world, Rabobank has very good practices in place to support our clients whose businesses are drought-affected,” a bank representative said.
“These have been very effective in assisting clients manage through difficulties.
“They include individual agreements reached with viable clients to hold off taking action for agreed periods to allow them to work through financial difficulties and rebuild their financial position when seasonal conditions improve.”
Other assistance measures for drought-impacted clients included carry-on finance for viable operations; waiving break costs on early redemption of FMDs, deferred loan payment schedules, and waiving fees on loan increases to rebuild operations.
“Any clients struggling with drought and not already speaking with us should contact their local rural manager,” the bank said.
Westpac’s message was similar.
“We already have many initiatives in place to support customers in drought-declared areas, including not charging penalty interest rates,” its spokesman said.
“These initiatives have been offered for over a decade and apply to all natural disasters.
“If customers have financial trouble, we work with them individually to give personalised support.”
Practical financial solutions available may include restructuring existing loans free of usual establishment fees; deferring interest payments; additional finance to help cover cash flow shortages, and freezing risk margins for primary producers receiving rate subsidies via government assistance schemes.
Rabobank also noted, in relation to debate about FMD offsets, its “all in one” (AIO) transactional loan facility, already provided options for farming clients to “proactively manage interest costs”.
“Unlike standard rural term loans, AIO accounts are tailored to provide flexibility as a revolving line of credit combining transactional and loan facilities,” the bank said.
“This offers advantages over standard term loans whereby income deposited automatically reduces the debt, thus reducing interest payments.
“Rabobank currently does not offer FMD offsets, however we will continue to assess this.”
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