Monday, April 22, 2024

New lending rules could benefit sector

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New lending rules wreaking havoc on residential borrowers have not had any noticeable impact on farm lending and could even spur the banks to look favourably again at the sector after a lean couple of years.
Here’s a list of popular finance providers’ lending options available to farmers looking to grow their business in these uncertain times.
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Real Estate Institute spokesperson Brian Peacocke says the new lending rules show no signs of hitting rural lending.

New lending rules wreaking havoc on residential borrowers have not had any noticeable impact on farm lending and could even spur the banks to look favourably again at the sector after a lean couple of years.

Since the start of December, banks have been applying extra scrutiny to loan applications in response to legislation designed to protect borrowers from saddling themselves with unaffordable levels of debt.

While the Credit Contracts and Consumer Finance Act had seemingly been motivated by a desire to crack down on loan sharks, it has ended up capturing a far larger share of the market than ever intended.

Bankers are being extra cautious under pains of fines of up to $200,000 if they are found to have failed to follow the letter of the new law when assessing loan applications.

“The banks are erring on the side of caution because nobody wants to be the first cab off the rank in a lawsuit,” KPMG bank audit partner John Kensington said.

Kensington had been told by one banker that at his own bank loan approvals had fallen by a quarter since the beginning of December when the legislation came into force.

However, the new rules show no signs of hitting rural lending, according to the Real Estate Institute’s rural spokesperson Brian Peacocke.

He’d completed farm sales in the lead-up to Christmas and had been marketing properties since early in January where he was having a lot of conversations with purchasers.

“Whether the holiday period means they have not caught up with such issues I do not know, but if they were in the market for lending they would have been talking to banks I would have thought … but at the moment it is not an issue,” Peacocke said.

The managing director debt of NZ Agri Brokers Scott Wishart said the ups and downs of farm incomes and a comparatively smaller pool of buyers for the underlying asset should the borrower get into trouble meant banks demanded a wider range of information to support loan applications from farmers.

By comparison, decisions to lend on houses had been made based on a much more limited set of measures.

“Rural lending has been assessed that way for nearly three decades … you had to provide profit and loss statements and balance sheets and budgets to access debt,” Wishart said.

“That is something you have never had to provide as a borrower for a (housing) mortgage.”

“For retail borrowers it is (now) about doing away with the general rules and specifically looking at every borrower to make sure their own situation fits the bill.”

Rather than creating the conditions for a rural credit crunch, Wishart said the new legislation could be supportive of more lending flowing to the sector after a lean couple of years when the main trading banks had encouraged farmers to reduce debt.

“If the banks cannot get money out the door in one area, they are going to be looking for more opportunities to lend (elsewhere) and there are a few things helping them with that at the moment,” he said.

“Obviously high commodity prices and significant amortisation (of debt) over the past 2-3 years is giving them a few tailwinds to invest more in agriculture without really increasing the portfolio risk a whole lot.”

He said where farmers might expect greater scrutiny was in borrowing to fund off-farm investments.

Wishart had already heard of one case where a farm succession had been disrupted by the new legislation.

“Part of that plan required borrowing against the farm to buy a small lifestyle block in the nearest town for Mum and Dad to move into,” he said.

“That got caught up … because what salary do Mum and Dad have?

“And what was their personal expense history … well, the farm had paid for everything.

He said the loan for the parents’ new house had been turned down because they were not able to provide history of their spending habits to the bank.

“All the boxes they had to fill out they just couldn’t provide.

“Previously the banker would have approved the debt as a housing loan and everyone would have moved on.”

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