Subsidies for Rural Bank deplored

Press, Volume CXV, Issue 33934, 29 August 1975, Page 12

Subsidies for Rural Bank deplored

I From OLIVER RIDDELL, our Wellington reporter)

WELLINGTON’. | It would be a waste of scarce resources to use Government subsidies to enable the Rural Bank and Finance Corporation to weaken other farm lendinir institutions, according to the chief economist of the Bank of New Zealand (Mr L. C. Bayliss).

The need was to strengthen the involvement in fanning of these institutions. he said, when addressing the convention of the Institute of Agricultural Science in . Wellington this week “Unless Rural Bank interest rates are raised to market levels, or its loans are granted on a highly restrictive basis, there is a considerable danger that other institutions will be increasingly forced from rural len-. ding because of an inability to compete with the Rural Bank," Mr Bayliss said. A situation where the Rural Bank became the predominant source of farm finance, and where its annual: funds allocation was increasingly subject to political and national budgetary concerns, would not be in farmers’ long-term interests.

BORROWING FROM PUBLIC Rather, the Rural Bank should seek to reduce its total dependence on the annual allocation of funds in the Budget by borrowing directly from the public —\ for instance, through the issue of debentures or notes. ; Future finance needs; would require the farmer to. develop a more professional approach to farm financial management. Mr Bayliss said, particularly if resource use was to be improved and higher debt-equity ratios and, higher interest rates were to 1 be serviced. The level of, debt was a major determinant of the extent to which farmers sought outside advice. Mr Bayliss said that the adoption of "price-smooth-; ing" techniques would have; a major influence on meat and wool farming financing patterns, and should very substantially reduce fluctuations in short-term indebtedness.

“Price smoothing” would also enable the meat and wool farmer to budget with greater confidence, with the result that the risk margin would correspondingly j dimmish — which would well encourage meat and wool farmers to accept, higher debt-equity ratios. A steadier income pattern, other things being equal, implied higher average rates of farm capital expenditure. “Price smoothing will also assist lenders; greater stability of borrowers’ income means less risk, enables better budgeting, and results in less volatility in security values.” Mr Bayliss said. “The cost to financial institutions of providing shortterm finance to sustain: farmers in a price downturn! has been high, since surplus; liquid funds must be held to; meet such a contingency.”

PRICE OF LAND Land price escalation had been a major influence on the demand for mortgage funds, which upward trend was likely to continue while land was a scarce resource; and there was a widespread belief that inflation would continue, while economic conditions continued to pressure the bona fide farmer into amalgamation, and while the farmer was able to pay a high price for adjoin-, mg land because of interest rates and other financial concessions. It was fairly clear that the! position of dairy farmers generally was quite good, Mr Bayliss said. Their debtequity ratio was relatively low in comparison with past years, and this, together with present income levels, was sufficient to maintain a high rate of investment. The meat and wool farmer also had a relatively low debt-equity ratio, but had insufficient profitability to finance a sustained high rate of investment. POSITION OF BUSINESS “In this respect, the position of business is much worse than that of farming, because the debt-equity ratio of business is getting alarmingly high and many businesses arc being forced to borrow heavily so as not to go bankrupt,” Mr Bayliss said. The average debt-equity I ratio in business was about 50 per cent, while in meat 1

and wool farming it was: about 25 per cent; but farmers had a very high proportion of their equity in land, which they could realise only upon sale or if they died. There was a high proportion of non-institutional farming debt, which also! applied to housing mortgage; debt, said Mr Bayliss. •CONTROLS FAILED’ This was primarily the re-! suit of New Zealand’s official monetary policy which,; in an effort to control credit and interest rates, had relied on a wide range of ad hoc controls over certain interest rates and over the activities of certain financial institutions such as banks and insurance companies. “It is now accepted that these controls have not only failed to achieve their

objects, but have also caused severe financial distortions and thereby seriously diminished the efficiency of the financial sector,” Mr Bayliss said. Generally, the impact on farming had been much less serious than for other sectors, mainly because farming had had priority status in official policy — particularly through the availability of funds from the Rural Bank and from trading banks.

INTEREST RATES The interest rates farmers: paid on most of their borrowing from the Rural Bank, and to some extent from trading banks, were below market rates of interest. One consequence of this was to accentuate land-price increases, Mr Bayliss said. Moreover, they resulted in a wasteful use of capital. “Sub-market interest rates will make it increasingly difficult to attract investment funds to farming, and will thus mean an increasing dependence upon Rural Bank funds and the consequent political decisions of funds allocation to the Rural Bank,” he said. Farmers were best served when they were provided with financial services by a range of competing institutions. I.' future farm profitability was to be as- ; sumed, farmers had to see their way clear to pay market interest rates for their 'finance.