RURAL FINANCE IN NEW ZEALAND.

New Zealand Journal of Agriculture, Volume XL, Issue 6, 20 June 1930, Page 395

RURAL FINANCE IN NEW ZEALAND.

THE INTERMEDIATE CREDIT SYSTEM AND TONG-TERM ADVANCES.

Paper presented by

J. J. Esson,

C.M.G., Chairman, Rural Intermediate Credit

Board, to the Empire Farmers' Conference, held at Wellington, 24th March,

1930.

There is probably no country in the world where better provision exists in the credit system for primary producers than in New Zealand, both as regards short-term and long-term loans, or where greater opportunities are afforded the industrious farmer with small capital. I say “ small capital ” advisedly, for whilst personal ability, character, and experience are essential, it is imperative that the farmer himself should contribute a certain amount of the capital required in his business. It is the only buffer between his creditors and loss, and he should constantly endeavour to maintain his equity unimpaired, for when “ sailing too close to the wind ” he is in serious trouble directly prices fall.

In recent years there has been a large increase in- the number of lending institutions, which has not been an unmixed blessing. Credit has its disadvantages as well as its advantages, for when it is too easily obtained it becomes a temptation to overspend and to borrow injudiciously. Indeed, our experience has shown that in the past credit was often too easily obtained, and money was borrowed without due regard to its profitable employment. Values were much inflated during an abnormal period of high prices. Land was bought at impossible prices, stocked and cultivated on credit by farmers, many of whom added to an overwhelming liability by the purchase of costly machines, motor-cars, and suchlike on the instalment plan.

New Zealand is still recovering from that stage; and although a liberal lending policy is observed, that liberality is checked when the applicant, although he may be a good moral risk, is burdened with liabilities and charges which cannot possibly be met out of the income of his farm, or when it is sought to be taken advantage of to cover personal extravagance, negligence, or speculation in land and stock instead of practical occupational farming.

There is less room to - day in the rural credit system for the speculator, who regards farming as an opportunity, not as an occupation, and it is becoming understood that the true value of land is not found in its selling-price but in its productivity, its lasting-qualities, and average annual return, or that its earning - power- determines its loan value.

Here as elsewhere there is the same urgent demand for credit in periods of adversity, when it is sought as a. desperate remedy ; but no institution, whether State or co-operative, can afford to make loans which prudent investors would reject as hazardous and excessive. Every effort is, and should be, made to foster our primary industries and to improve the conditions and prospects of those upon the land, but it has to be recognized that unlimited credit will not help farmers when unprofitable prices prevail, for it would only be adding to their burden

of liabilities. It is an axiom that cheap money cannot restore pricelevels. The only consideration must be how much credit can be profitably employed or be profitable for the farmer to borrow.

The main sources from which the New Zealand producer obtains credit are (i) the commercial banks ; (2) private companies, stock and station agencies, &c. ; (3) State or State-fostered organizations. For short-term loans the two former have rendered and continue to render great assistance to the primary producers ; in fact, they have established “ a service which through long usage and custom has become almost indispensable,” and, considering the cost of supervision and the risk run generally, their interest rates are not unduly high.

Time, however, will only permit me to give a general outline of the State and State-fostered organizations, which are obviously designed to benefit the small farmer rather than the larger landholder. The latter can usually finance on reasonable terms ; for instance, one of our leading commercial banks recently instituted a long-term reducible mortgage, an example which is being followed by other large lending institutions.

Long-term Advances.

The State Advances system, providing for long-term loans on farm lands on the amortization plan, was created by the Government Advances to Settlers Act, 1894, under which a Government Advances to Settlers Office was established. Its purpose was to assist agricultural development by providing capital for settlers at reasonable rates of interest. The preamble to the Act read as follows : “ Whereas by reason of the high rates of interest charged on mortgages on land, and the heavy incidental expenses connected therewith, settlers are heavily burdened and the progress of the colony is much retarded : And whereas it is expedient that the Government should afford such relief in the premises as is consistent with the public safety : Be it therefore enacted," &c., &c. '

The new Department was authorized to make loans not exceeding £2,500 to individual borrowers on three-fifths of the value of freehold land, and up to one-half of the borrower’s interest in leasehold land. The loans were repayable over a term of thirty-six and a half years. Loan funds were to be provided by the sale of Government debentures or stock, which nominally increased the public debt of the Dominion but against which the first mortgages held by the Advances Office provided an ample set-off.

It is hardly necessary to stress the advantage possessed by this method of finance when compared with - the old way of borrowing on a flat mortgage for five, seven, or ten years, which made it very hard for the farmer, who during periods of financial stringency sometimes lost his farm because he could not get his loan renewed.

Amortization worked wonders for the settler who secured a State Advances Office loan. He was relieved of the fear of foreclosure, and the reduced interest lightened the drag upon his income. The expense of renewing his mortgage every few years no longer had to be met, while the right to repay the whole or practically any portion of the loan at any time placed him in an even more favourable position. Added to all this is the fact that he is steadily year by year improving his position in the way of reducing his capital liability by regular payments

which are not sufficiently large to be burdensome. The operation of the Act has also benefited farmers who are not borrowers from the State Advances Office, because shortly after it became law the interest rates charged by other agencies were materially reduced. The fear was expressed that the State would in time become the sole mortgagee, but . this has proved groundless so far as the farming community is concerned. The State systems have proved regulative rather than competitive, as the bulk- of the farmers continue their old business connections, but certainly under more favourable terms.

To bring the Act into operation arrangements were made for a loan of £1,500,000, and such was the demand that at the end of 1928-29 the amount owing to the Settlers Branch on mortgages on rural lands was £12,958,433. Under the Rural Advances Act of 1926, which further extended the facilities to farmers, an additional amount of £1,875,285 had been advanced up to the end of the financial year 1928-29. - . • Since the inception of the Act there have been various amendments with a view to making its benefits available to as many farmers as possible. The legislation is now embodied in the State Advances Act of 1913 and its amendments, also the Rural Advances Act of 1926, which constituted a fresh branch of the Advances Office. The Rural Advances Act was passed following the report of a Royal Commission on Rural Credits which was appointed in 1925 to investigate the system of rural credit in different countries.

At present the maximum advance which may be made to any applicant is £3,500 under the Advances to Settlers Branch and £5,500 under the Rural Advances Branch, the margin of security required being 25 per cent, under the former and 33J per cent, under the latter. Loans may be granted for twenty years, thirty years, or thirty-six and a half years. The example set by the Legislature has been followed by other lending agencies, and a considerable portion of the money now advanced by other Government Departments and outside financial institutions is loaned on long-term mortgages repayable by instalments. Funds for the Rural Advances Branch are obtained by the sale of bonds secured upon the collective mortgages, but as both interest and principal are repayable to lenders out of the Consolidated Fund they are to all intents and purposes instruments of State.

Intermediate Credit.

In addition to the system of long-term credit provided by the State Advances and Rural Advances Acts, further effect was given to the recommendations of the Royal Commission, already referred to, by the Rural Intermediate Credit Act, 1927. Briefly, intermediate credit is credit given for a longer period than is contemplated in commercial transactions and of shorter duration than the usual mortgage term. It enables the producer to meet his seasonal requirements without embarrassment, as it covers farm credit for periods ranging from six months to five years, and is secured upon farming stock and chattels, and non-perishable farm products.

The State Advances Amendment Act of 1922 contained authority for advances up to £SOO on the security of farm stock and chattels, but its administration was centralized in Wellington, and in the. absence

of local machinery it. was not availed of to any great extent. Another provision, the Rural Credit Associations Act, in the same year, empowered farmers to join together for the purpose of securing accommodation upon their available assets with a joint-and-several liability. This was fatal in itself, "and as no central organization was set up to provide funds for investment upon the members’ securities no associations were formed.

The burden of financing the primary producers in the development of their holdings and during the periods of low prices thus devolved upon the banks and the stock and station agencies, whose action in providing what was in effect a system of intermediate credit was really outside their essential activities and anything but a profitable part of their business.

■ The outstanding feature until recent years was the lack of a central organization for attracting a flow of capital for investment in farm securities. In New Zealand, as in other parts of the world, secondary industries, commercial and business undertakings of all kinds, had through.the development of the joint-stock company form of enterprise absorbed in constantly increasing extent the savings of the community, and primary industry suffered in consequence. Experiences during the recurring periods of low prices in connection with investments upon individual farm units had also tended to weaken confidence. It was evident that some steps were urgently required to organize and co-ordinate farm credit in order to make it attractive to those who wished to lend money at a reasonable rate on proper security, and to provide a loan currency which would conform [to the [requirements of seasonal production.

The Act of 1927 was the outcome, and one of its prime objects was to restore the confidence of investors and thus secure a flow of capital for investment upon rural securities, such as stock, produce, and other chattels at reasonable rates of interest.

The administration of the system is entrusted to an independent Board of eight members, three of whom are —namely, the Financial Adviser to the Government, the Superintendent of State Advances, and the Public Trustee, who is the Commissioner of Rural Intermediate Credit; the remainder are appointed by the GovernorGeneral in Council, and consist of practical farmers and men with long experience of New Zealand banking, finance, and merchandizing. Sixteen subsidiary or district boards, consisting of five members each, have been appointed by the central Board. The District Intermediate Credit Supervisors in each district act as the local representatives of the central Board and are ipso facto members of their respective district boards. .The boards are fully representative of the various classes of the community interested in rural' finance. The detail work is carried out by the Public Trust Office organization as agent for the Board, and the branch officers of the Public Trust Office throughout the Dominion act as the local representatives of the Board, those in the more important centres acting under the designation of District Intermediate Credit Supervisor, with definite statutory powers and duties.

Finance.

Initial funds for investment by the Rural Intermediate Credit Board were provided by an advance of £400,000 from the Consolidated Fund

free of interest for the first ten years, one-third to be placed to the credit of a special redemption fund for the purpose of redeeming debentures issued by the Board, and the remaining two-thirds to be available for making advances as permitted by the Act. Grants, were also made to the Board up to a total of £IO,OOO to cover the expenses of • establishment and the preliminary cost of administration; The permanent and main source of. the Board’s funds for investment, will be the issue to the public of debentures secured upon its assets and by the provisions of the Rural Intermediate Credit Act of 1927. These debentures will, in effect, have priority over the. claims of the Crown to repayment of the advance of £400,000, as repayments to the Crown are restricted so that they may not exceed in total the amounts transferred to the reserve accounts of the Board. The total of the debentures issued by the Board may not at any time exceed the sum total of the advance from the Consolidated Fund and the amount of the investments of the Board, or the sum of £5,000,000, whichever is the less.

Methods of Loans by the Board.

The funds provided are made available to the farming community by four methods, providing ample scope for co-operative effort upon the part of farmers in relation to their credit requirements.

ASSOCIATIONS.

The first of these methods is by advance to farmers as members of a special form of limited-liability company known as co-operative rural intermediate credit associations. The Act enables farmers to combine for the purpose of financing themselves as individuals on their collective financial strength, as a group. The procedure briefly is for a group of farmers of not less than twenty in number to form an association, and the Board is authorized to advance funds to the association, to be loaned by the association to its . members upon approved securities. Farmers who subsequently desire to apply for loans through the association may be admitted as members, and members who have repaid their loans, or do not propose to lodge applications, may be permitted by the directors to retire and may receive the agreed value of ‘ their shares, provided that their retirement will not reduce the membership of the association below the statutory minimum. ' . '

The minimum share capital which a member must contribute is twenty-five £1 shares, and a shareholding of this amount will permit a member obtaining a loan up to £250 if his security is considered sufficient. A member desirous of obtaining, a larger loan must take up shares to the nominal value of one-tenth of the' amount. of the loan, and consequently a member’s shareholding may range' from £25 up to £2OO in the case of the. maximum loan of £2,000. Members of associations are not liable for the loans obtained by other members beyond the amount of the share capital which they have subscribed.

Associations are not intended to be trading bodies or profit-making concerns, and are subject to certain statutory restrictions imposing safeguards considered necessary by reason of the fact that they will mainly be debtors of the Board, which in turn is trustee for the debenture-holders who have invested their funds in the Board’s business, and for the Crown in respect of funds advanced on . loan from the Consolidated Fund. On the other hand, it has been' possible to

exempt the associations from charges levied in the case of commercial companies, and the procedure with regard to their formation and working is much simplified. The Board may also make advances to associations up to £25 each to meet the preliminary expenses incurred in their formation. Such advances are made by way of loan free of interest for periods up to ten years.

• The maximum amount of loans which may be granted to members of associations was fixed by the Rural Intermediate Credit Act of 1927 at £l,OOO, but by an amending Act in 1929 the limit was increased to £2,000. The purposes for which loans may be granted are defined by the Act, and include mainly the improvement of the farm property (including the erection of buildings), the purchase of implements, stock; seeds, and similar farm requirements, the payment of mortgages, debts, or other liabilities incurred in relation to farming operations, and generally any such purposes approved by the Board. The Act also provides that loans should be granted on a reducing basis, the instalments being fixed by the Board to suit the requirements of the various classes of loans. The Board has fixed its interest-rate at 6| per cent, per annum, and this rate is charged upon the daily balance of the loan accounts. The securities taken are mainly mortgages of farming stock and chattels, with, in suitable cases, collateral security over the farm properties.

Up to the present twenty-eight co-operative rural intermediate credit associations have been formed in various parts of the Dominion, thus providing farmers in a large number of districts with the opportunity of approaching the Board for loans upon their live-stock and chattels and other farming assets. Up to the . present associations have been formed mainly in dairy-farming districts, but with the recent increase of the limit for loans, and the introduction by the. Board of a new system for advances in connection with sheep and grain securities, increased activity in the formation of associations in. sheep - farming districts is anticipated..

LOANS DIRECT TO FARMERS.

The provision for loans direct by the Board to farmers did not appear in the Bill originally submitted to Parliament providing, for an intermediate credit system, but were introduced by a special parliamentary committee set up to consider the Bill, and on which farming interests were extensively represented. These provisions enable a farmer to apply direct to the Board for an advance, provided he is able to arrange a guarantee satisfactory to the Board for such, amount as may be required by it, being not less in any case than 20 per cent., of the original amount of the loan, the collateral security afforded by this guarantee replacing the collective, responsibility of an association for advances made by the Board to its members. The addition of this alternative method provided for the development and extension; with adequate safeguards, of the existing facilities under which loans on chattel securities could be obtained under the State Advances system.

The conditions with regard to the maximum amount of loans, the purposes for which loans may be granted, the rate of interest chargeable,. and the repayment of the loans which have been set out in regard to association loans apply to direct loans granted by the Board. The securities are generally of the same nature as those taken in connection with association loans, with , the additional, security , of a guarantee asrequired by the legislation.

Most of the loans issued, by the Board direct to farmers have been granted with the guarantees of dairy companies co-operative and proprietary. ' Up to the present forty - nine companies have made arrangements with the Board for the acceptance of their guarantees of loans. The bulk of these companies are co-operative dairy companies, so that their utilization of the provisions of the Act for direct loans has the same practical effect as the establishment of associations among their suppliers.

DISTRICT BOARDS.

The majority of the applications for loans of £250 or under submitted either through associations or direct to the Board are dealt with and granted or declined by the district boards. The district boards also consider all direct applications in excess of that sum, and submit recommendations regarding them for the guidance of the central Board. The tendency is to gradually increase the powers of the district’boards. In addition a number of matters affecting the administration of direct loan accounts, such as applications by borrowers for readvances for necessary purposes of sums received from the realization of stock and produce or from other sources, are dealt with by committees of the district boards composed of the District Supervisor and at least one other member of the district board.

LOANS TO FARMERS’ CO-OPERATIVE ORGANIZATIONS.

Advances are also made to' farmers' co-operative societies upon the security of live-stock or produce. To be eligible to receive a loan a co-operative society must be engaged in the production or sale of staple agricultural or pastoral products, including live-stock and goods manufactured from any such produce, must have a subscribed capital of not less than £2,500, and be composed of not fewer than thirty members.

DISCOUNTING.

The central Board is also- authorized to discount farmers’ promissory notes or bills of exchange which are endorsed to the satisfaction of the Board. The maximum amount available to a farmer by this method is £2OO, and the amount of any other loans which he may have obtained from the Board has to be taken into account to ensure that the total accommodation provided for him does not exceed the limit of £2,000 fixed by law. The discount rate is 6| per cent., and the period for which advances are made in this method is restricted to one year, or in special cases two years. . . . The discounting method is utilized mainly by dairy companies desirous of assisting suppliers to finance their minor seasonal farm requirements, such, as manure and seeds, and small purchases of stock. The dairy companies, usually arrange for a deduction from. the milk or . cream cheques of suppliers for whom they have discounted notes, in order that they may be in possession of sufficient funds to meet the notes on maturity. Where a dairy company is discounting a large number of notes with the Board the monthly deductions reach a. considerable total, and in such cases the Board permits the company to retire promissory notes prior to maturity and allows a rebate of interest, but insists that this saving of interest must be passed on to all the suppliers affected. In these circumstances borrowers will •be paying 6| per cent, only on the amount outstanding on account of their loans from month to month.

Up to the present thirty-seven companies have made arrangements with the Board to accept their endorsements of promissory notes for discounting with the Board. The method of fixing limits for companies is identical with the procedure in connection with the limits imposed in respect of guaranteed loans.

SHEEP AND GRAIN SECURITIES.

Up to the present the scheme has. been utilized mainly by the dairying industry, the loans granted to other classes of farmers such as sheep-farmers and grain-growers being limited in number and amount. This is due to a number of special - causes. In the first place, the limit of £l,OOO fixed by the principal Act proved insufficient for the requirements of sheep - farmers and ’ grain - growers during the period when no revenue is forthcoming and the expenses associated with farming operations have to be met. In the second place, sheep-farmers did not have at their disposal the same facilities for obtaining guarantees of loans as dairy-farmers with their dairy companies behind them, and consequently were not able to utilize the provisions of Part 111 of the Act to the same extent. In the third place, the system for fixed loans to be liquidated over a period of years, although • suited to the requirements of dairy - farmers, was not . applicable to the circumstances of sheep - farmers, whose indebtedness steadily increases during the major portion of the year and is then rapidly liquidated either in whole or in part. ' ' In view of the fact that sheep-farmers may be expected to approach the Board mainly through the medium of associations, the introduction of this system is expected to stimulate the formation of associations in sheep-farming districts. , ■

General.

Each country has its own peculiar financial and seasonal difficulties, but the problem in each is how to discount farm securities at the lowest possible rate. . It is generally agreed that the solution is not to be found in the duplication of existing institutions, but in organizing the resources of the primary producers themselves, so as to provide a basis for joint concerted action in their own behalf in order to get the capital they must use. 7 “ The development of the group system gives the - farmer the experience which teaches him to use money in a business way, leading ultimately to financial independence, by putting him in direct relationship with a self-supporting institution through which capital can be obtained. In combination farmers can command capital, credit, technical advice, and commercial attention. The fact that the resources and responsibility of several individuals are combined together increases the confidence of lenders and creates an asset which is equivalent to the asset of goodwill upon which corporate industry, relies.’'

This possibility exists in New Zealand, where the co-operative spirit is well developed. The State and State-fostered schemes are established on a sound basis with adequate provision for administration and losses. They have brought the borrowing farmers into closer relationship with the lenders, and money is borrowed and loaned at cost price, but that price is governed by inexorable laws, and'can only be reduced by the

willingness of farmers themselves to undertake certain services and responsibilities, which they can do with little or no financial risk when properly organized. In New Zealand they have the opportunity and are taking advantage of it.

Note. regard to the foregoing paper the writer acknowledges his indebtedness to various reports and publications, which have been freely drawn upon to set out the position in New Zealand.