Royal Commission shows sunlight is the best disinfectant

Forcing farmers off their land and family homes cuts asset values, says Jan Davis

AFTER

a slow start, and more than 280 submissions in regards to rural lending, the Financial Services Royal Commission agreed last month there would be value in focusing attention on interactions between farmers and banks.

Over the course of a week, the commission heard about a very fraught relationship between farmers and financiers. Evidence was given of loan terms being changed without notice or consultation, over-stated property values, and unethical and heartless treatment of farmers once loans had been revoked.

Tasmanian cattle farmers Michael and Dimity Hirst were the first to give evidence. They were forced into default when the bank cut valuations on their property by 40 per cent in 2011 without warning. In front of the commission, five years later, an executive of the bank finally offered an apology for selling off their farm and forcing them into bankruptcy.

The commission heard that banks pushed interest rates on loans up to extraordinarily high levels if a farmer was deemed in default to use as leverage. In some of the cases heard by the commission, this was as high as 16 per cent. When Commissioner Kenneth Hayne intervened to ask what the leverage was for, he was advised this was to achieve a reduction in debt or sell a property. Sales of rural banking loan books also resulted in farmers being placed in default by the new lenders who didn’t understand their businesses.

The audience broke out in applause when Chris Wheatcroft from Rural Financial Counselling Service of Western Australia spoke about the impact of sending in the receivers.

“There is nowhere to go once the receivers [are called] in. And in terms of value, farmers will see that hardearned money, farm and asset disappear under a receiver like you’ve never seen,” he said.

“They would perceive the money is absolutely wasted and it would be hard … to say that’s not correct. There’s a massive destruction of value. And that sits deeply with people.”

Yet evidence presented to the Commission revealed forcing farmers from their properties is a no-win proposition — something that is not news to people in the industry. Properties often take years to sell, especially during drought, and forced sales drive overall values down throughout the district. This then has a knock-on effect, as low prices on forced sales push other farmers into technical default because of low loan to valuation ratios.

Forcing farmers off their land and from their family homes actually reduces asset values. Farms left vacant and unmanaged rapidly depreciate. Infrastructure is not maintained, and incursions of weeds and feral animals contaminate productive lands. This too has spill-over effects onto neighbouring properties, and contributes to depressed

community conditions.

It’s clear that, despite their crucial role, many banks still don’t really get the vagaries of farming. They don’t understand how different farm lending is — or should be — to commercial and housing lending. Not only do the central administrators in banks lack the information and expertise to question these assessments, their business models have encouraged overvaluation and overborrowing as a means to grow their businesses. Worse still, they don’t seem to appreciate the broader social and economic dimensions of the role they have in managing farm risks.

Many of the problems in the evidence given to the commission have resulted from a lack of communication between banks and farmers — and there is a clear pathway to resolve this situation.

One of the key recommendations of the 2017 Senate inquiry into primary production financial lending was for the establishment of a national farm debt meditation scheme that would see speedy resolution of farm finance issues. There has also been discussion in the commission of the need to implement a nationwide approach to farmers in distress.

Such a scheme would make it compulsory for banks and other creditors to offer mediation to farmers before commencing debt recovery proceedings on farm mortgages.

The Royal Commission has brought into the open what many of us in the industry have long known. The pressure of not performing is high, and there is clear evidence that mental health issues are a big issue for farmers who are trying to desperately hang on in difficult circumstances.

There’s a saying that sunlight is the best disinfectant — and exposure of the unethical behaviour of some financial institutions will no doubt lead to more transparency.

Implementation of this recommendation would go a long way to ensure that there is no repeat of the unfortunate behaviours that have now come to light.