New World, Old Challenges
So what changes can we expect once the ink is dry on Hayne’s tome? Whilst the interim reports have been received and we are yet to see the final outcomes we have already noticed the beat of the jungle drums have changed in Bank Land.
Some key phrases that you’ll hear your bankers using will centre around themes of:
- Responsible lending
- A tightening of credit as a result of increased regulation and compliance
- A lengthening of turnaround times due to complexity and compliance
Responsible lending is simply a term that invokes the role that banks and non-bank lenders play in ensuring that lending provided to their customers is prudent and commercially sound. A strong focus on Interest Only lending to the sector historically will continue to come under focus as bankers seek to find a reasonable pay-back period for the long-term debt they are providing against landed assets. If Australian agriculture is going to continue building resilience, a focus on retiring debt where appropriate will be an essential part of the capital flow.
We have certainly heard anecdotes of a tightening of credit, it’s always helpful to remember that this isn’t happening in a vacuum and it’s a good idea to ensure that you look at each application on its merits. We have a significant drought, high commodity prices in many sectors and in some parts of the state there’s been a strong uplift in land values. It stands to reason each renewal or increased proposal warrants a thorough application and approval process. ORM would encourage farmers and businesses to consult an independent advisor around their finance arrangements to ensure that it makes good business sense before taking their banker at their word. It just makes good business sense to get some independence into this process and ensure that you have another set of eyes to assess it and preferably one who is willing to challenge your thinking or if necessary say no.
The lengthening of turnaround times which we are advised is due to complexity and compliance also has implications for our sector. In my view, this is only part of the truth, the Banks are all in the process of streamlining their business as the technology is updated and as with the rest of the economy we are seeing some roles and tasks being phased out as automation takes over. Overlay this with a need to build in hard stop compliance and ensure quality and you have a longer approval, documentation and review process. To counteract this, ensure you have your information as up to date as possible. This should include your business performance, performance of actual results in comparison to budget, the outcome of harvest and the details of any assets you wish to acquire and the business case that supports your proposed investment and capital expenditure for the coming year.
Despite all of the noise around the Royal Commission the Agricultural Lending Data 2016-17 report, released in October 2018 provided
“…proof of the strength of Australian agriculture and the robustness of lending to the sector.”
The report states that in 2016-17 banks had more than $70 billion in lending with the agricultural sector, during this same period agricultural production exceeded $60 billion for the first time and farm exports hit $49 billion. The ongoing dry offset by further increased commodity prices would suggest that 2017-18 and onwards will be no different.
Australian agriculture is still in a strong position and the finance industry views it as a long-profitable investment.
We are fortunate to have a strong finance sector in Australia, your relationship with your financier will continue to be key to operating a successful business. Businesses that have sound management, strong management information systems and are run professionally can expect to obtain great service and world competitive pricing from bankers who truly understand your business. If this is not the case for you, please get in touch and let’s set about working on this key professional relationship with you.
References:
https://www.minterellison.com/articles/financial-services-royal-commission-interim-report-overview
For more information contact Liz Duncan at liz.duncan@orm.com.au