Finance with Don Fraser Fraser Farm Finance

Rural finance is a hot topic and not for the faint hearted. Banks have done a great job in putting their funds with farmers' cash and helping them buy farms.

Many farmers have done extremely well, re-paid or managed bank debt to their own advantage and come out very wealthy. However, a minority have not done so well and now find they are facing a forced sale of some form.

In the late 1960s and early 1970s, there was only the State Advances Corporation (owned and run by the Government) and a few private lenders which included some insurance companies. This is where I started my banking career as did many of your senior lenders today. State Advances became the Rural Bank, and then was taken over by the National Bank, (now the ANZ) and other banks then came into the market. Realistic debt with planned repayments was the 'name of the game”.
Fast forwarding in time to the boom, it lasted for 10 years straight. Many of the young rural bankers finished at university and had never seen hard times, let alone a recession. Banks were recruiting young inexperienced bankers and putting them out into the market place very early with little experience to support them. More than that, banks had two parts to their business – the ‘sales' man and the ‘client service' man. The sales man was on commission to ‘sell' money (for example, a product) – and sell they did. Commission selling was the wrong incentive for some in a boom.

A number of these young ‘salesmen' got carried away and advanced money at ratios that we crusty old bankers could not understand, and more importantly – would not do.
I, for example, stopped at $26 debt per kg. They, however, kept going to $40 debt per kg and even $50 debt per kg. Farmers had no show of servicing that level on a long term basis. In fact, sustainable debt loading, according to AgResearch, is around $20 to $25 debt per kg.

Additionally, there were many cases where young bankers 'cooked the books” to get a loan approved. Why? Because there was commission involved and banks were vying for market share. For example, if one bank would not do the deal, then the farmer would go down the street to another bank or even to a third bank, and so on. This caused frenzy – and logic flew out the window.
Now, the best way I can explain what happened is to use a water tank as an illustration. The roof of the water tank is the total asset value and the water is the debt. The closer the water (debt) gets to the roof (total assets) the less air (or equity) there is.

You see, the banks have first 'dibs” on everything and you get what is left. If it gets out of balance, they call up the water tanker, get their water out and leave you with what is left. Often very little air.
More than that, there are no controls or standards that must be met by the liquidator and/or receivers (in the case of a company) or a realtor (in the case of a sole trader sale). This is why some people want a debt mediation bill, to force banks to mediate a solution that leaves the existing party with something (some air) and their dignity. Remember, earlier on, in many circumstances it was the banker who was your best mate peddling more money.
Going back to when you owned the air in the water tank, if you stopped paying the interest 'rent on the money” then the banks really started to 'amp” up the pressure.
Additionally, in the boom, banks were trying to sell other products, such as life cover, sickness insurance, swaps, and fixed rate loans to increase the return to the bank (and to the sales person as well).

So, there you have it. We must not blame the banks for all of it because we were the keen borrowers. But, on reflection things may have been done in frenzy by the bankers which leaves a lot to be desired, and many farmers have and will face their demise with little dignity. This is not bank bashing, it is about telling it how it was and it is - the 'good, the bad and the ugly”.

These are the opinions of Don Fraser of Fraser Farm Finance. Any decisions made should not be based on this article alone and appropriate professional assistance should be sought. Don Fraser is the Principal of Fraser Farm Finance and a consultant to the Farming Industry. Contact him on 0800 777 675 or 021 777 675. A disclosure document is available on request.