APPENDIX 4
Answers to questions on notice received from the Department of Agriculture
Department of Agriculture
Committee inquiry:
Senate Economics Legislation Committee inquiry into the Reserve Bank Amendment
(Australian Reconstruction and Development Board) Bill 2013
Date Held: 18
March 2015
Question Taken on Notice
Question:
Senator XENOPHON: Firstly, why didn't we get a submission
on this earlier? Can you explain that to me?
Mr Padovan: I cannot answer that one.
Senator XENOPHON: Who can? Maybe you can get back to me as
to why there was a decision made not to provide a submission to this inquiry.
That would be useful. Dr McGovern says that there is very little public data
that is available on the performance of rural loans. Ms Schneider, do you disagree
with that? Do you believe that there can be a more comprehensive picture of
rural loans other than has been provided to date?
Answer:
The department does not routinely submit to all inquiries
and takes into consideration; whether the department is the lead agency,
information currently available and its capacity to contribute.
Department of Agriculture
Committee inquiry:
Senate Economics Legislation Committee inquiry into the Reserve Bank Amendment
(Australian Reconstruction and Development Board) Bill 2013
Date Held: 18
March 2015
Question Taken on Notice
Question:
Mr Padovan: I would have to go back and look at the timings
around Basel III.
Senator XENOPHON: Could you take that on notice as to when
Treasury and your department will be having discussions about Basel III and the
impact on rural debt.
Answer:
The current prudential framework is based on the principle
that banks are required to hold more capital against riskier lending.
Overall compared with residential mortgages, business loans may have higher
risk weightings because of the additional risks present.
The Basel III capital framework sets out
internationally-agreed minimum requirements for higher and better quality
capital for banks globally. The Australian Prudential Regulatory Authority’s
application of Basel III came into effect in Australia in January 2013 and has
been largely implemented.
Treasury is continuing to monitor global developments in
capital rules and is consulting with industry on the recommendations in the
Financial System Inquiry. Treasury has indicated that it will engage with the
Department of Agriculture as regulatory standards are progressed.
Department of Agriculture
Committee inquiry:
Senate Economics Legislation Committee inquiry into the Reserve Bank Amendment
(Australian Reconstruction and Development Board) Bill 2013
Date Held: 18
March 2015
Question Taken on Notice
Question:
CHAIR: But you really do not know whether you are
replicating what other countries like Canada and the US are doing in this
space. Can you have a look at that? Can you have a look at where you are at
variance with those models that operate in those two bodies and perhaps give us
a one-page brief, on notice?
Answer:
The Department of Agriculture has worked with Treasury to
provide the following high-level summary based on publicly available
information of the current farm credit systems in the United States of America
and Canada.
US Farm Credit System (FCS) and Farm Credit Canada (FCC):
comparisons with Australian Government Concessional Loans
- US Farm Credit System (FCS)
-
The FCS was established in 1916 to provide below market-cost
loans and credit to the US agriculture sector. It operates as a nationwide
network of cooperative borrower/farmer owned, government-sponsored lending
institutions. The cooperatives were created to spread risk and ensure the FCS
was only partially underwritten by the US government.
-
The US Federal Agricultural Mortgage Corporation, commonly known
as ‘Farmer Mac’, was established in 1987 as part of the FCS, as the 1980s farm
recession sent the government-backed FCS into crisis. It operates as a
secondary credit market of cheap liquidity and lending capacity for FCS
lenders, so it can meet demand from the agriculture sector for credit and
long-term loans at stable interest rates and terms.
-
Farmer Mac conducts its business primarily through two programs:
- o
Farmer Mac I, in which Farmer Mac purchases, or commits to
purchase, qualified agricultural or rural housing mortgage loans, or
obligations backed by qualified loans
- o
Farmer Mac II, in which Farmer Mac purchases the portions of
qualified loans that are guaranteed by the U.S. Department of Agriculture
-
Farmer Mac guarantees the timely payment of principal and
interest on securities backed by qualified loans or guaranteed portions, and
either retains those securities in its portfolio or sells them in the secondary
capital markets.
-
Farmer Mac also purchases non-performing loans from stressed
lenders and provides US Government guarantees on those loans to prevent
the cost of credit rising in the FCS and the system becoming unsustainable as
it did in the 1980s.
-
Farmer Mac does not lend directly to farmers, but effectively
acts as a ‘lender of last resort’ given it can purchase non-performing loans
from other lenders.
-
There is risk that, as a holder and guarantor of non-performing
loans, ongoing cheap credit creates an artificial market of low cost loans that
are not viable in the long term.
- Farm Credit Canada (FCC)
-
Farm Credit Canada (FCC) is Canada's largest provider of business
and financial services (including loans) to farms and agribusinesses. FCC is
financially self-sustaining, raising funds on public markets, as well as
borrowing from the Canadian Government.
-
It is argued that FCC operates on a semi-commercial basis, as it
borrows from the Canadian Government at preferential rates or issues debt
backed by it. It is therefore able to fund riskier loans as the expected
return, minus funding costs, is higher than for private competitors, and
provides loan products which have higher risks of default (i.e. those with long
amortization periods, higher loan-to-value ratios, and interest-only periods).
-
FCC argues it is not a lender of last resort as it charges a
premium on its lending, assesses credit history, past/projected financial
performance, off-farm income and security. It argues it should not become a
lender of last resort as it would expose taxpayers to more risk; its current
practice of lending to varying sized customers and sectors spreads risk.
-
FCC provides specialised and personalised business and financial
services and products to farming operations, including family farms, and to
those businesses in rural Canada, including small and medium-sized businesses,
that are businesses related to farming and that provide the inputs to and
outputs from primary production and young farmers (below the age of 40).
-
The FCC product portfolio includes: lines of credit, crop input
finance, livestock purchases, equipment finance, farm transfer finance, land
and building purchase, environmental solution finance to assist in switching to
more environmentally sound practices and renewable energy resources. There are
various intermediate and long-term loans, with lending periods as long as
29 years
- Australian Government Concessional Loans Schemes
-
The Australian Government’s concessional loans provide
short-term, targeted assistance to farm businesses suffering financial hardship
but which have sound prospects of returning to commercial viability.
-
The two drought-related concessional loans schemes are targeted
at those farm businesses experiencing significant financial impacts due to
circumstances that are outside the ability of a farm business to reasonably
prepare for, manage through and recover from.
-
The loan can be for no more than 50 per cent of a farm business’s
debt; is limited to debt restructuring and/or productivity enhancements; is for
a maximum of five (Farm Finance and Drought Concessional Loans Schemes) or ten
years (Drought Recovery Concessional Loans Scheme); must be repaid in full at
the end of the loan term.
Department of Agriculture
Committee inquiry:
Senate Economics Legislation Committee inquiry into the Reserve Bank Amendment
(Australian Reconstruction and Development Board) Bill 2013
Date Held: 18
March 2015
Question Taken on Notice
Question:
CHAIR: I would extend on that, Senator Madigan. Australian
people regard the security of their food as a very high priority. In the
context of berries recently, they would be somewhat shocked if they felt that
the Australian government was not supportive of continuing a vibrant industry.
We are going to have to wrap up shortly, but can you tell me the cost of the
concessional loan scheme to the Australian taxpayer?
Answer:
Answer: The net cost of the concessional loans schemes (Farm
Finance, Drought and Drought Recovery) to the Australian taxpayer over
financial years 2013-14 and
2014-15 is $22.105 million. The actual cost in the out years of the programmes
will be determined by the level of uptake under each scheme and levels of
default and/or write-off.
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