First came the drought, then the banks’ cold indifference

This week’s hearings of the banking royal commission tried to get to the bottom of the bad relationship between farmers and their banks.

Mel Ruddy: ‘You need a bank that knows you.’ Picture: AAP

There were sorry stories of horrifying and heartless banking misconduct towards small and often remote farmers aired to tears, gasps and corporate apologies at the special banking royal commission sitting in Brisbane this week.

But after the angst and widespread sympathy for wronged farmers, two big questions remain unanswered.

Why do farmers appear so much more at the mercy of the big banks, which hold 96 per cent of the agricultural sector’s $71.7 billion debt load, than city-based small businesses?

And why do banks seem ready to so mercilessly take advantage of that power imbalance, as has been exposed so rawly this week by formidable counsel assisting the commission, Rowena Orr, in her forensic evidence presented of dozens of recent farm foreclosure cases and her systematic grilling of senior bank executives?

The commonly assumed answer, that the cause is too hasty debt call-ins and forced farm sales by major banks lacking understanding and patience for the cyclical, variable and seasonal nature of Australian agriculture with its flooding rains, long droughts and a “pitiless blue sky”, was not a major theme of this week’s “bad banks” hearings.

Rural lender NAB, which holds one-third of the debt, worth $20bn-plus, and which has more than 20,000 farm customers, appeared to show patience with north Queensland cattle farmers Debbie and Ken Smith, who were $3.2 million in debt and in default in 2012 before they were hit by the current six-year drought, rock bottom cattle prices and the live cattle export ban.

The Smiths made a formal agreement to sell their Hughenden station Limbri in 2013 to repay debt but it proved unsaleable in the drought. The Smiths still own and run cattle and still bank with NAB, which has not yet taken enforcement action, possibly because the drought continues.

The Australian Banking Association says the notion of a rural banking crisis is itself overblown.

Its figures show that just 0.65 per cent of rural loans were more than 90 days overdue — the definition of default — at June 30 last year and that there were only 33 foreclosures and 96 formal farm debt mediation sessions in 2016-17. Farm loan interest rates are at their lowest level on record at 5 per cent.

In a farm finance backgrounder, the ABA says: “There is no financial incentive for a bank to deliberately lose a customer.

“The banking industry is acutely aware of the difficult circumstances facing some farmers from droughts, natural disasters and low farmgate prices. Banks work closely with farmers and their families during tough ­periods.”

But the royal commission has highlighted many cases to the contrary, identifying systemic failures and deep-seated problems with the way banks deal with farmers and rural loans.

Poor communication, farmer isolation, the closure of rural bank branches and the withdrawal of local country bank managers, and the poor understanding of agriculture by city-based bankers in head offices lay at the heart of some tragic stories.

As Charleville farmer Mel Ruddy said, mutual trust and the benefit of shared experience started to disappear when his country town bank branch closed, bank managers continually changed and drought hit.

He said: “I’m used to a bank manager you’ve known for a long time, who comes out to see you; you have a cup of tea, then drive around in the ute and make decisions about what to do next.

“It’s always worked like that; you need a bank that knows you, understands what you do and is prepared to be a bit forgiving and ride it out.”

But more common were tales of woe involving bank deficiencies. A common thread was of farms being overvalued, which led to unnecessarily large new loans being written by local bank managers paid performance bonuses and success fees if they met annual growth lending targets.

There were the many cases like that of celebrated farmer Charlie Phillott, 84, of Winton, who lost his Carisbrooke farm without missing an interest repayment, because an on-paper devaluation of his drought-affected farm in 2013 triggered a “non-monetary” default.

Then there were farmers never offered farm mediation options; conflicts of interest by regional bank managers; improper application of “perverse” default interest rates of up to 18 per cent on farmers in long-term drought; and the rushed eviction of farmers and the appointment of receivers, resulting in properties being sold empty, out of season and way below their real value.

But overriding the hearing was an indifference and clinical coldness shown by all the banks to farmers in financial distress, often through no fault of their own.

While banks made financial provisions on their balance sheets for bad rural debts — especially in 2014-15 when bank farm foreclosures were at their height — there was little thought for the real people and families left homeless and often still holding the bank debt behind those “impaired loans”.

The commission heard of Steve and Janine Harley in Western Australia, whose family had owned their sheep farm for more than a century before ANZ took over their former Landmark loans and gave them just one day to vacate their home and property, after their debt fell due.

And of an email revealing how a local ANZ rural manager had complained to head office that Mrs Harley was hard to deal with because she became “quite emotional” in discussions.

But as Ms Orr drilled down, ANZ’s head of lending services Ben Steinberg was forced to admit that at that time of Mrs Harley being “difficult”, her husband had just suffered a heart attack.

ANZ also refused to delay debt repayment deadlines or let the family sell their remaining four parcels of land in spring when the farm looked at its best rather than call in the receivers (who eventually sold the land at a much lower price).

It was a similar story for Roma cattle farmer Libby Handley. After years of drought and creeping debts, ANZ called a mediation meeting with Mrs Handley which the bank refused to delay, despite a plea of ill health by Mrs Handley.

Ms Orr told the commission if ANZ had inquired further, as Mr Steinberg said it should have, it would have discovered Mrs Handley had just been diagnosed with breast cancer and was having major surgery that same day.

Later examination of Mrs Handley’s loan files revealed her ANZ managers had also falsely witnessed signatures; overcharged fees and default interest; had failed to extend a promised overdraft; and had incorrectly bounced her cheques because of their own system failures.

Then there was Arthur and Rhonda Cheesman from ­St Arnaud in Victoria, left homeless when forced by ANZ to sell their four cropping farms to repay debt, when the bank’s own advice was that the total farm sale price would have been greater if one small block with a family home, in which three generations of the Cheesman family could have remained living, had not been included in the sale as they requested.

But the Mr Steinberg disputed Ms Orr’s assertion that such a callous approach breached community standards and expectations of what is a fair and reasonable way for a bank to treat its customers.

“Certain parts of the community might expect us to do that (leave the Cheesman family with a home to live in); but others might think that if the bank has the right to reclaim its debt, it should,” Mr Steinberg told the commission. He later said the bank had a responsibility to its shareholders and mum and dad depositors.

“Today we would have more empathy; there has been a change in the way the community expects banks to behave (which) has resulted in a cultural change in our department (which now) requires us to demonstrate a more caring and empathetic attitude.”

Commissioner Ken Hayne dryly interceded, asking if the issue was not about whether the bank legally could turf its customers out of their homes — or even how it met community attitudes — but simply whether it was “the right thing to do”.

Rabobank, Commonwealth Bank through its Bankwest subsidiary and ANZ all fell into strife because their rural bank managers were highly “incentivised” to write and sell as many new loans as they could in a year.

The commission heard managers were each set annual loan-writing targets and key performance indicators that needed to be achieved to win a pay bonus which could double their $120,000-plus annual salaries or in the case of Bankwest a holiday for its rural lending “champions” on Hayman Island.

Queensland grazier Wendy Brauer outside the banking royal commission. Picture: AAP

In northern Tasmania, farmer Michael Hirst said he felt “groomed” and “pumped up” by ANZ bankers flattering him on his farming ability and then offering him bigger loans.

Central Queensland cattle woman Wendy Brauer described it more as being “hunted” when her Rabobank bank manager not only emailed then, unsolicited, said he had found a property the Brauers might want to buy.

He then valued it himself and neatly arranged a three-way sale-purchase deal between the Brauers, the vendor and another local cattle family, all of whom were ­Rabobank clients.

Two years later, their accounts were frozen and the property had to be sold at much less than its original price, almost destroying Adrian and Wendy Brauer’s marriage and leaving them with just $5 in their cash account.

There were examples of rogue bank managers, false signatures, deliberately bloated credit assessments, irregular bank employee conduct, mistakes in transferring funds to wrong customers, incorrectly bounced cheques and conflicts of interest by bank managers who owned their own cattle herds or bought distressed farms.

Legal Aid Queensland agricultural specialist Dennis McMahon says he is continually horrified at the lack of compassion shown by banks towards their farm clients.

Mr McMahon told the commission the rural banking problem was not due to a lack of education or financial illiteracy on the part of farmers — “ they are ­always exactly aware of where they are with their overdraft” — but the torrid affect of tough times.

He said: “When you’ve been six years in drought, had to shoot your livestock, run out of feed and can’t even go into town because you can’t pay your bills, it’s a mental health issue — these farmers are sick and suffering from depression.

“I’ve been to places where there is three months of mail sitting in the corner and the bank manager wonders why he can’t contact them; the banks need to give people time and understanding of the trauma and distress they are going through and not treat them with coldness and ­indifference.”