Four states – New South Wales, Victoria, Queensland and South Australia – have legislated for farm debt mediation.[1] There are differences between the schemes but, essentially, each requires banks and other creditors to offer mediation to farmers before taking enforcement action against farm property, including the farm itself and farm machinery. The object is to have a neutral and independent mediator assist the farmer and the lender to reach an agreement about current and future debt arrangements. As was revealed in case studies dealt with in the Interim Report, farm debt mediation has too often been treated as a step that is taken only because the lender considers enforcement very probable, even inevitable, and the applicable statute requires a process of mediation before enforcement can proceed. The mediation may then be treated as no more than a step that must be taken before the lender demands and obtains an order requiring repayment of all that is owing.
Properly used, however, mediation may allow the lender and the borrower to agree upon practical measures that will, or may, lead to the borrower working out of the financial difficulties that have caused the lender to treat the loan as distressed. Ordinarily, then, I consider that lenders should offer farm debt mediation as soon as the loan is classified as distressed. If used in conjunction with rural financial counselling services,[2] early farm debt mediation should allow wider and better choices for the lender and borrower about servicing, and ultimately repaying, the loan. As indicated below, I consider that the 2019 Banking Code should be amended accordingly.
In addition to this question about the timing of farm debt mediation, however, there is a wider issue about its regulation. As mentioned, only four states have legislated for farm debt mediation (South Australia’s compulsory farm debt mediation scheme having entered into force since the publication of the Interim Report). In addition to this, Western Australia operates a voluntary scheme.
One solution to the issue of inconsistent adoption of farm debt mediation by states would be the instigation of a single national legislated scheme. There was little or no disagreement expressed in submissions to the Commission that there would be advantage to this solution.[3] The evident advantage of a single scheme would be that banks and other lenders would be expected to formulate nationally applicable policies and training about how best to use the scheme. And using the scheme to best advantage should result in better and more orderly resolution of the difficulties that are presented for both lender and borrower when a loan is distressed.
What about the application of Banking Code provisions to agricultural enterprises?
Many agricultural enterprises employ fewer than 100 full-time equivalent employees. If the amount of the particular facility is less than $5 million, Mr Khoury’s draft of the Banking Code would have applied the Code’s small business provisions to the transaction. As I have already said, I favour the definition of small business and small business facility proposed by Mr Khoury after his detailed review of the Code and its operation.
There are, however, several respects in which I consider that applicable norms of conduct should be amended to deal with agricultural enterprises. They concern valuation of security, farm debt mediation and charging default interest.
First, I consider that Prudential Standard APS 220 should be amended to require that internal appraisals of the value of land (including, but not limited to agricultural land) be independent of loan origination, loan processing and loan decision processes. APRA has already said that it intends to revise its credit risk capital framework to effect this position.[4]
Second, I consider that APRA should amend APS 220 to provide for valuation of agricultural land in a manner that will recognise, to the extent possible:
- the likelihood of external events (including, but not limited to, fire, drought and flood) affecting the land’s realisable value; and
- the time that may be taken to realise the land by sale at a reasonable price affecting the land’s realisable value.
Third, as further explained below, I would not stop banks providing in their loan agreements for charging of default interest (whether by fixing a rate and providing that a lower rate is ‘acceptable’ so long as there is no default, or by adopting some other form of provision). But I do consider that there are powerful reasons for the ABA to amend the 2019 Banking Code to provide that, while a declaration remains in force, banks will not charge default interest on loans secured by agricultural land in an area declared to be affected by drought or other natural disaster.
Natural disasters are not the only reason an agricultural loan may become distressed.
Although I would stop short of proposing any change in the law or in the Code, I would urge banks dealing with any distressed loan to recognise and apply their own hardship policies. Evidence to the Commission suggested that banks may not always have done so in connection with distressed agricultural loans.[5]
Fourth, when dealing with distressed agricultural loans, I urge banks to:
- ensure that those loans are managed by experienced agricultural bankers;
- offer farm debt mediation as soon as a loan is classified as distressed. The purpose of mediation should be to seek agreement about how to work out of existing and reasonably anticipated financial distress;
- manage every distressed loan on the footing that working out will be the best outcome for bank and borrower, and enforcement the worst;
- recognise that appointment of receivers or any other form of external administrator is a remedy of last resort; and
- cease charging default interest when there is no realistic prospect of recovering the amount charged.
I will say something further about the final point. Providing for the payment of default interest is, and should remain, a matter for any lender to proffer (within the limits of the law) as a term of the loan contract it offers to make. But there comes a time, especially in connection with distressed agricultural loans, when charging default interest serves no larger commercial purpose than providing a bargaining chip to be thrown onto the table by the bank even though, when played, it is a chip with no realisable value.
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Recommendation 1.11 – Farm debt mediation A national scheme of farm debt mediation should be enacted. Recommendation 1.12 – Valuations of land APRA should amend Prudential Standard APS 220 to:
Recommendation 1.13 – Charging default interest The ABA should amend the Banking Code to provide that, while a declaration remains in force, banks will not charge default interest on loans secured by agricultural land in an area declared to be affected by drought or other natural disaster. Recommendation 1.14 – Distressed agricultural loans When dealing with distressed agricultural loans, banks should:
cease charging default interest when there is no realistic prospect of recovering the amount charged. |
[1]Farm Debt Mediation Act 1994 (NSW); Farm Debt Mediation Act 2011 (Vic); Farm Business Debt Mediation Act 2017 (Qld); Farm Debt Mediation Act 2018 (SA).
[2]See generally Department of Agriculture and Water Resources, Rural Financial Counselling Service (RFCS) (6 August 2018) Department of Agriculture and Water Resources <www.agriculture.gov.au/ag-farm-food/drought/assistance/rural-financial-counselling-service>.
[3]See, eg, ANZ, Interim Report Submission, 25[122]; CBA, Interim Report Submission, 24[125]; Westpac, Interim Report Submission, 46 [220]; Suncorp, Interim Report Submission, 4; ABA, Interim Report Submission, 29–30 [3.3.7]; NAB, Interim Report Submission, 33–4 [124]–[125]; ASBFEO, Interim Report Submission, 8.
[4]APRA, Module 4 Policy Submission, 5 [19]–[20].
[5] Transcript, Ross McNaughton, 29 June 2018, 3581–3.