The Treasurer today announced the Banking Royal Commission “Roadmap.”
The roadmap document, available here, provides a response to each of the recommendations made by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
The recommendations relevant to Agricultural Lending, and the response today, are set out below:
Recommendation 1.11 – Farm debt mediation – A national scheme of farm debt mediation should be enacted.
The Government is working with states and territories through the Agriculture Ministers’ Forum (AGMIN) to progress work on the establishment of a national farm debt mediation scheme
A National Farm Debt Mediation scheme is a universally supported measure, which has been recommended by numerous inquiries over several years. Implementing such a popular and well-supported measure should be relatively straightforward.
Recommendation 1.12 – Valuations of land – APRA should amend Prudential Standard APS 220 to:
- require that internal appraisals of the value of land taken or to be taken as security should be independent of loan origination, loan processing and loan decision processes; and
- provide for valuation of agricultural land in a manner that will recognise, to the extent possible:
- the likelihood of external events affecting its realisable value; and
- the time that may be taken to realise the land at a reasonable price affecting its realisable value.
On 25 March 2019, APRA released for public consultation proposed revisions of Prudential Standard APS 220 Credit Quality. Consultation closed on 28 June 2019. APRA intends to finalise the standard in the second half of 2019 with a view to it becoming effective from 1 July 2020.
An independent internal valuation will add some cost and delays for some remote customers, but otherwise should not be controversial, or difficult to implement.
As discussed here in greater detail, it is harder to understand how valuers will change their practices to implement the second recommendation around “external events.”
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.
The ABA has announced the amended Banking Code, incorporating recommendations 1.8 and 1.13, will be implemented by March 2020.
Recommendation 1.14 – Distressed agricultural loans – When dealing with distressed agricultural loans, banks should:
- ensure that those loans are managed by experienced agricultural bankers;
- offer farm debt mediation as soon as a loan is classified as distressed;
- 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.
The Government expects that banks will implement recommendation 1.14 as soon as possible.
Banks will believe that they already manage every distressed loan on the footing that working out will be the best outcome for bank and borrower, and enforcement the worst and recognise that appointment of receivers or any other form of external administrator is a remedy of last resort. In my opinion they will be untroubled by those recommendations, and comfortable with immediate implementation.
A requirement to offer farm debt mediation as soon as a loan is distressed may be problematic – depending on what is meant by distressed, which is not otherwise defined. For example, in Victoria a lender can only initiate FDM by serving a notice that they “intend to take enforcement action.” If the recommendation is intended to make FDM available in situations where enforcement is not planned, then the respective FDM legislation will require amendment.
A mandatory requirement to ensure Agri loans are managed by experienced agricultural bankers will have banks working to understand what “managed” means. Often the banker in contact with the customer is not the banker making the final credit decision. Does the recommendation require the customer contact to be an experienced agri banker, or the credit approver, or both?