Treasury fears unintended consequences from proposed new laws to ensure farmers facing foreclosure can enter into mediation with banks.

The Government is on the verge of introducing legislation to offer struggling indebted farmers the right to enter into mediation with banks, giving them an alternative route to foreclosure, but Treasury fears it could make it hard for farmers to get credit. 

The proposals come after a Members Bill from New Zealand First MP Mark Patterson was withdrawn last year following a scathing select committee review. 

Patterson withdrew his bill, on the understanding Agriculture Minister Damien O’Connor would take it up.

The proposed legislation would allow farmers to enter into mediation with banks before being foreclosed on.

But Treasury has reservations. An aide memoire from Treasury to Finance Minister Grant Robertson in November notes that the “impact of the proposal is likely to be minor” and “there is a lack of evidence that lenders are taking unreasonable action against farmers to recover debt”. This statement is based on “feedback from lenders”.

Bankers Association CEO Roger Beaumont said the banking industry supported the idea, although the proposals would just “codify what is already happening in practice”.

“The industry supports a farm debt mediation to codify many of these processes and provide clarity and an alternative support option for farmers,” Beaumont said. 

“Last year NZBA began developing an industry-led farm debt mediation scheme but it was overtaken by the Government’s proposed initiative, which we support in principle,” he said.

Patterson said the need for action was acute, given the power imbalance between banks and borrowers. 

“There’s a huge power imbalance that we’re seeing between farmers who have had a lot of equity but might have over-extended and the banks have lent like drunken sailors during the commodity boom,” Patterson said.

He said the need for change was even more urgent now the Reserve Bank is proposing to hike the amount of capital banks are required to carry. 

“There’s a systematic pullback from the Australian banks,” Patterson said. 

“The capital requirements the Reserve Bank has put on is adding to that pressure.”

Data from the Reserve Bank shows agricultural lending has slowed relative to other forms of lending undertaken by banks. Total loans to the sector grew by 5 percent between December 2016 and March 2019, about half as fast as the total rate of lending, which grew 12 percent.

Business lending grew by 16 percent and lending on housing, both owner-occupied and investment, grew by 13.5 percent in the same period. 

Treasury’s advice to Robertson suggests this reluctance to lend to farmers could actually be worsened by the proposals. 

It said the change could “affect the cost and availability of credit for farmers”.

However, the paper also noted that in Australia, where a similar system is in place, stakeholders were “unanimous that their regimes supported better outcomes for both farmers and lenders”.

It said that agreements reached under mediation had “greater longevity” and delivered better outcomes for both lenders and borrowers.

Agriculture Minister Damien O’Connor said he didn’t accept Treasury’s advice regarding the cost of credit.

“In terms of availability if it means the banks and the borrower are more cautious before they get into debt, then that’s probably a good thing,” he said. 

O’Connor said the issue of farm foreclosures was a longstanding one, and he had “always supported the idea and the concept” of legislation around mediation. 

“It’s been an issue that’s been floating round for quite some time going back to when we were last in Government.”  

He said the legislation should be ready by the end of the year and passed before the next election. 

“The Bill is pragmatic and the banks are aware of the processes.” 

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