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Bendigo and Adelaide Bank has called on the prudential regulator to amend standards around agribusiness lending to better reflect different cash flow cycles.
In its written submission to the financial services royal commission this week, Bendigo and Adelaide Bank suggested that the standards established by the Australian Prudential Regulation Authority (APRA) do not allow for different definitions of loan impairments for different types of agribusinesses, such as cropping or cattle farming.
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“The APRA standards which apply to agribusiness lending encourage banks to actively manage their credit risks through increased capital charges following ‘default’ (for example, when an account becomes 90 days past due),” the regional bank wrote in its submission.
“Under current prudential standards, the definition of default is the same for all asset classes, for example, as between residential and business loans.”
According to its subsidiary Rural Bank, due to the “long and infrequent cash flow cycles” in different agricultural sectors, 90 days past the due date of repayments is “an inappropriate measure of default for many agricultural loans”.
It suggested in its submission that 180 days could be more appropriate for some agricultural sectors, while 360 days could be more appropriate for others.
“In the context of the commission’s fourth round of hearings, the Queensland beef cattle sector (and specifically those solely or predominantly exposed to the live export trade) is particularly relevant, with these businesses often having a single cash flow event on a 12-month cycle,” Bendigo and Adelaide Bank stated in its submission.
Agribusinesses accounted for 8.3 per cent, or $15.5 million, of Rural Bank’s total impaired loans as of 30 June 2018, Bendigo and Adelaide Bank informed the royal commission.
“At that date, there were only two customers with term loans being charged default interest by the bank, and these loans totalled approximately $15.5 million, with $15.1 million relating to one customer,” the regional bank wrote in its submission to the royal commission this week.
Rural Bank’s impaired term loan portfolio was $186 million as of 30 June 2018, the submission further noted.
“The additional capital held against this portfolio (as required by APRA) was $9 million, with an approximate cost to Rural Bank of $927,000,” Bendigo and Adelaide Bank stated.
“The bank collected just $466,000 in default interest against this portfolio — representing just 50 per cent of the cost of carrying these impaired loans.”
Bendigo and Adelaide Bank also defended Rural Bank from misconduct claims, noting that the agribank is not a signatory to the Code of Banking Practice and therefore cannot breach the code.
It also pointed out in its submission that the behaviour that was questioned by the counsel assisting the royal commission was that of Elders staff (not Rural Bank staff), who reportedly withdrew information from Rural Bank staff that would have impacted the approval of a $2.15 million loan.
The counsel assisting alleged that the loan should not have qualified for approval, but Bendigo and Adelaide Bank argued that there was little to demonstrate that the customer would not be able to repay their debts or that the customer, who was a surgeon and not a full-time farmer, was experiencing any financial difficulty.
“In circumstances where the customer’s strategy was to on-sell some of the purchased land to repay the facility, Rural Bank had an appropriate basis to believe the customer would be able to repay the loan. And given that Rural Bank had lent to the customer at less than the value of the purchased land, it was lending at an appropriate loan-to-value ratio,” the regional bank stated in its submission.
[Related: Bendigo Bank becomes the latest lender to hike rates]
