Survey shows banks snubbing Dr Bollard on farm business overdraft interest rates

New Zealand’s farm businesses have received only around half of the 150 basis points cut from the Official Cash Rate (OCR) since 4 December. A survey of business overdraft interest rates, conducted among members of Federated Farmers in early to mid January, shows that business overdraft interest rates have been cut by an average of just 78 basis points. Survey results are included with this media release.

“Federated Farmers is extremely disappointed in the trading banks that the average overdraft rate for farm businesses is 10.40 percent, or over twice the current OCR. That’s a massive margin banks have and continue to build at the expense of the productive export sector,” says Philip York, the Federation’s economics and commerce spokesperson.

“The Federated Farmers survey backs up anecdotal reports by members that since the current OCR easing cycle commenced back in July 2008, farm businesses have not seen the OCR cuts reflected in their financial facilities.

“We think Dr Bollard was mindful banks were dragging the economic chain when he warned financial institutions on 4 December to ‘do their bit’, by passing on OCR savings to their customers. Banks seem to have interpreted this as meaning their retail, rather than business customers.

“The key thing about an overdraft facility is that it provides vital working liquidity to small and medium sized enterprises. Farmers, who largely receive seasonal payouts, depend on overdraft facilities to meet financial commitments throughout the balance of the year.

“The banks are literally farming the farmers to keep their profits high. They know farming in particular is relatively low risk yet have built up fat margins nonetheless. With the last cut in the OCR bank margins have grown by 72 basis points alone and this is unacceptable. It is affecting the nation’s economic recovery on and off farm.

“By cutting overdraft interest rates by only around half that cut from the OCR last December, there appears to be a degree of profiteering. The banks are price gouging farmers who generate most of New Zealand’s export wealth. This is money being sucked out of the provincial economy.

“If the same approach to overdraft interest rates is applied to the wider business community, the banks will also be hitting the businesses which account for the majority of employment in New Zealand.

“This must be of deep concern to the Government and the Reserve Bank as the Government knows New Zealand will need an export led recovery.

“By not passing on OCR savings to their business customers, banks are putting a brake on the ability of businesses to retain profit, reduce debt and retain staffing levels in the current economic climate.

“The banks seem to be hiding behind a façade of mortgage rate cuts, but the New Zealand economy turns on its farmers and small to medium sized businesses. Federated Farmers feels a rocket needs to be put under the banks to get these critical business overdraft rates down,” Mr York concluded.

RESULTS OF SURVEY INTO OVERDRAFT INTEREST RATES

ARE BANKS DELIVERING?

On December 4 the Reserve Bank slashed interest rates by 150 basis points taking the OCR from 6.5 percent to 5 percent. As part of the statement, the Governor, Dr Alan Bollard also said… "To ensure the response we are seeking, we expect financial institutions to play their part in the economic adjustment process by passing on lower wholesale interest rates to their customers.”

Federated Farmers conducted a survey of its members between 5 and 12 of January 2009 to find out if lower interest rates had been passed onto farmers. The survey was sent to all Federated Farmers members with an email address.

Federated Farmers received 345 usable responses to the survey. This is considered a good response rate given the time of the year. Being a self-selecting survey, the results are however derived from a specific target group.

The average overdraft interest rate faced by farmers on 4 December 2008 was11.18 percent.

At the time the survey was conducted (5-12 January 2009) the average rate was 10.40 percent.

The average difference between the respondents’ overdraft interest rates on December 4 and when they responded to the survey was 78 basis points (0.78 percent). Just over half of the 150 basis points (1.5 percent) cut from the OCR had been passed on to farmers through their overdraft facilities.

Broken down by farm type:

· Meat & Fibre (n=138): the average difference was 0.84 percent (from 11.04 to 10.20 percent).
· Dairy (n=143): the average difference was 0.78 percent (from 11.25 to 10.47 percent).
· Arable (n=23): the average difference was 0.58 percent (from 11.67 to 11.09 percent).
· Other/mixed farmers (n=41): the average difference was 0.69 percent (from 11.11 to 10.42 percent).

Loan conditions

The also survey asked since December 4, “…have the conditions of your loan changed?”

· 85% of respondents said NO
· 12% of respondents said YES

However, most of those who answered YES, misinterpreted the question and responded that the interest rates on their loan had changed. For others who answered correctly, some examples of changes in loan conditions include:

· “On mortgage they are looking for 55 point increase in margins
· Term loans now have a cost of funds surcharge. 90 day rate is transparent with this charge
· Margin went from 0.95 to 1.15 percent in mid November for SWAPs, ‘due to increased cost of borrowing on bank’s account; have not changed since
· There has been a $400 fee put in place should we want to shift some overdraft to term and a four to six week wait if we want to borrow anything around $500,000 plus the $400 fee
· Increased their margins on our fixed term swap rates
· They have mentioned they can change the margin on our swap which wasn't mentioned when we signed up. It was sold to us more like a fixed loan
· Tightening up of the bank name removed attitude to extending our O/D or putting it on Term. Six months ago they were saying we will support you, now even with another drought looming, they have changed their speech to lets discuss how viable you are and please stay within your O/D and
· Margin change over rural lending rate.”

Respondents also remarked in their comments that floating and fixed mortgage rates had also fallen but, in their view, only slowly and not by as much as the cut in the OCR.

Selected additional comments:

· “In my view banks are not passing on the interest rate reductions in a timely or fair manner

· I know it is a complex issue, but overdraft rates are still way too high for my liking!

· I thought we would have had lower interest rates than this by now

· Every time the Reserve Bank drops rates, the bank name removed drops their rate 0.15 to 0.25 percent less

· I detect a reluctance on banks behalf to cut the rate

· Certainly hasn’t come down to what you would expect!!

· Must get around to threatening changing banks!!!! Next week I’ll be talking 2 my manager

· The banks are not bringing the rates down fast enough!!

· Thanks for doing this…good idea

· I would appreciate Federated Farmers putting some pressure on the banks to lower overdraft rates as I don't want to get off side with them at the moment!! and

· No, the banks are not delivering; we are paying for the risk margins imposed on them by their overseas lenders.”

Survey questions:

1. What was your overdraft interest rate on 4 December 2008?

2. What is your overdraft interest rate now?

3. What is your farm type? (e.g. dairy/sheep/arable)

4. Since 4 December have the conditions of your loan changed? (if yes, please specify)