Changes to Default Interest charges
There has been a lot of media recently surrounding the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
What we saw uncovered during the Royal Commission was, at times, shocking accounts of bank misconduct.
Ultimately the Commission produced 76 recommendations with a number of those relating to rural borrowers. The recommendations that seek to improve the treatment and outcomes for rural farm debt borrowers include a Federally Legislated Farm Debt Mediation program, which is currently in place in QLD. Improved independent Valuation process to ensure the valuation better recognises the likelihood of events outside the farmer’s control affecting the value and the time it may take to sell.
Notably Commissioner Hayne also recommended changes to the charging of Default interest.
The Commissioner stops short of recommending against the charging of default interest, however, recommends the Australian Banking Association (ABA) provides better protection for farmers in crisis by amending the 2019 Banking Code, so that default interest on a loan is not charged in an area declared affected by drought, flooding or other natural disasters.
Regarding treatment of distressed loans, the Commission recommended these loans are:
- Managed by staff experienced with agricultural banking
- Offered Farm Debt Mediation as soon as a loan is classified as distressed
- Managed on the basis that a ‘work-out’ is the optimal outcome, and enforcement (i.e. by way of appointment of an external administrator) is a remedy of last resort, and
- Ceased charging default interest when there is no prospect of recovery
Many of these measures have already been pre-empted by the major banks with more lenient treatment of rural borrowers impacted by natural disasters. Some banks are waiving fees, some are reducing interest rate margins and others are offering payment deferral.
As always, it is best to be on the front foot with your banker and advise them early of potential issues to enable them to provide you with options and time to develop and execute on your plan. You may also speak to them about what specific support is available to your enterprise. While it is becoming more difficult to secure credit, there is a lot of focus on the rural lenders and their treatment of customers. In most cases a genuine desire to see a positive outcome for their clients.
Should you require any external support your accountant or financial advisor in conjunction with finance professionals such as RB finance are able to assist. The Rural Financial Counselling Service also offers independent support and assistance. Read more about how Carrick Aland works with farming businesses here.
This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.