The Hayne Royal Commission declined to examine the conduct of receivers appointed by banks, in particular over agricultural enterprises.
Nevertheless, comments and recommendations in the Final Report[1] (Report) address concerns about how banks have handled non-financial farming enterprises.
National farm debt mediation
The Report for one thing recommends a national farm debt mediation scheme, which has been recommended before, in place of the individual states going it alone, as only some have. ‘There was little or no disagreement expressed in submissions to the Commission that there would be advantage to this solution’.
As the Report says,
‘Properly used … 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’.
The Report then says that ordinarily,
‘lenders should offer farm debt mediation as soon as the loan is classified as distressed. If used in conjunction with rural financial counselling services, early farm debt mediation should allow wider and better choices for the lender and borrower about servicing, and ultimately repaying, the loan’.
The 2019 Banking Code should be amended accordingly.
Dealing with agricultural enterprises – valuations, mediation and default interest
The Report says that in several respects, ‘applicable norms of conduct’ should be amended to deal with agricultural enterprises – in relation to the valuation of security, farm debt mediation and charging default interest.
First, 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 put this into effect.
Second, 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, while banks may include in their loan agreements for charging of default interest, ‘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’.
The Report points out that natural disasters are not the only reason an agricultural loan may become distressed. It
‘urges banks dealing with any distressed loan to recognise and apply their own hardship policies, which, according to evidence to the Commission’, is not always done.
Fourth, when dealing with distressed agricultural loans, banks are urged to:
- ensure that those loans are managed by experienced agricultural bankers;
- offer farm debt mediation as soon as a loan is classified as distressed, so as 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.
As to the last point,
‘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’.
Pending
Pending any change in the law or standards, banks’ instructions to their receivers may well heed these recommendations as matters of fair banking practice.
[1] Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, 1 February 2019. References omitted.
