Lending to the rural sector is no simple undertaking (and arguably not for the faint hearted). It is highly specialized and involves consideration (and even crystal-balling) of various (and uncontrollable) issues, predominantly:
- The rise and fall of Commodity prices;
- The rise and fall of Currency prices;
- Climate and weather conditions (with all their vagaries and vicissitudes).
To complicate matters, the business of the borrower will also very often be the home of the borrower and, perhaps, handed down over generations. The additional emotional consequences of failure are then profound.
The current banking royal commission is now to examine lending to farmers. The plight of farmers was one of the reasons that some National party MPs were prepared to support prior parliamentary inquiries and ultimately this royal commission, forcing the government and major banks to agree to it.
The major banks have put it on record that customers are free to give evidence at the royal commission whereas they may have been bound (and are still bound) by confidentiality agreements from talking to the media. There is great anticipation, therefore, around what may come forward.
A 2016 parliamentary inquiry into alleged impairment of customer loans found that no “misconduct” could be proved but that some farmers had been treated “unfairly” by the major banks.
Particularly under scrutiny to date have been the Landmark loans acquired by ANZ and the Bankwest loans acquired by Commonwealth Bank after the GFC. The particular criticisms of the banks generally and those banks specifically in their treatment of farming loans have been around allegations of:
- Banks requiring borrowers to refinance with another lender, against their will
- Attempts by banks to restructure loans either by way of reduction of the term of the loan or increase in interest rate (or both)
- Such refinancing requests or restructuring being required in cases where apparently there was no default in the servicing of the debt
- Properties being sold, upon foreclosure, at fire sale prices with farming families having been evicted from their homes, in such circumstances, still facing substantial residual debt
The concept of default under non-financial default provisions of security documents may well have the potential to cause some surprise to some borrowers. Nevertheless, where a lender has reserved to itself, under such security documents, certain powers of review, irrespective of the servicing of the debt then one has a better understanding of why a parliamentary inquiry may find no misconduct but, nevertheless, some unfairness.
There have been some public concessions made, to date, by certain banks in relation to their handling of farming loans. They relate to potential mistakes in properly assessing the non-financial aspects of the loan, lack of empathy and lack of transparency.
It will be the role of the royal commission in this round 4 module to;
- garner evidence which may not have been able to have been fully aired to date (whether by the effect of confidentiality provisions in agreements with customers or otherwise)
- determine whether there has been misconduct as well as unfairness (and, indeed, whether there is any practical difference)
- provide valuable guidance on what constitutes proper conduct and fairness in a very, very difficult area of lending.