The Final Report of the Banking Royal Commission

Business and Agricultural lending accounts for only 30-odd pages of the almost 500 page volume 1 of the final Report of the Banking Royal Commission.

Most significantly, the Report recommends broadening the application of the Code of Banking Practice to small businesses with debts of up to $5m (currently $3m).

Notably, the Report recommends against extending the application of the National Consumer Credit Protection legislation to Small Business.

Lending to Agribusiness

The report recommends that internal valuations should be conducted by bank staff independent of the loan origination and loan decision processes.  That may add a little to costs, and cause some delays for remote regional customers, but is otherwise hard to argue against.

The Report also recommends that valuations of agricultural land should be conducted:

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

The first adjustment would seem to be a complex calculation, and arguably unnecessary –  many would say that the market implicitly adjusts for such factors, and so there is no need to make an explicit adjustment.

The second adjustment seems to seek an allowance for holding costs that would result in a modest decrease in value – but it would have been very much easier if the Report had identified a specific period: six months perhaps?

Dealing with Distressed Agricultural Loans

The Report recommends that banks dealing with ‘distressed agricultural loans’ 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 Report does not provide a definition of ‘distressed,’ and it is not a technical term defined in APS 220, and so unfortunately the practical application of these recommendations is probably not as clear as its author intended.

Currently Farm Debt Mediation is only available where enforcement action has commenced.  The call for earlier availability – which will be supported by banks – will require legislative amendment.

Lastly, least surprisingly, Commissioner Hayne adds his voice to the unanimous calls for a National Farm Debt Mediation Scheme.  The Government has said that it will ‘take action on all 76 recommendations.’  Perhaps we will finally see a National Farm Debt Mediation scheme.

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