Allowing other financial institutions to compete will help economy

A government enquiry into rural banking will generate a lot of headlines over the coming year but is unlikely to disrupt the “cosy” banking oligopoly lending to New Zealand farmers.

That’s the verdict from Brent King, managing director of NZX-listed General Capital - owner of finance company General Finance, which currently offers some of the most competitive term deposit rates available to Kiwi investors.

“Between this inquiry and the one into personal banking, there’s a real risk of regulatory fatigue setting in,” says King. “We’ve known for years what will help the rural sector access the capital needed to help productively grow the economy. The Government and the Reserve Bank of New Zealand could make the changes tomorrow.”

Chief among those changes include altering capital adequacy requirements making it unattractive for many financial institutions to lend to the rural sector. New Zealand’s big banks, who borrow money from the RBNZ and loan it to their customers at a higher rate, are currently required to hold 80-90 per cent of the capital committed to their rural lending portfolios.

For other banks and finance companies, like General Finance, the capital requirement is 100 per cent. That compares to 35 per cent for loans on residential properties.

“It is why we don’t lend to farmers,” says King. “The RBNZ encourages us to pursue the lowest number – as we can get the best value from that. The problem is that doing all this work to help people buy a more expensive house isn’t helping society or the economy. We still have people living in leaky, cold houses.”

King acknowledges that the risk weights used in regulatory capital calculations reflect the higher risk of lending to the rural sector as opposed to backing residential property. Farming is capital-intensive and a commodity business sensitive to global demand for our key exports – milk, meat, wool and horticultural products.

“But, in the dairy sector, it’s generally a low-margin business where the price only might fluctuate 50 cents per litre of milk solids. It’s reasonably stable,” says King. “A price crash would hurt farmers financially and lower the value of rural farmland – which would have serious implications for companies that have lent money against those properties.”

There are levers the government can pull to bolster confidence in investing in the agricultural sector. “The coalition government has the goal of doubling exports in 10 years,” King points out.

“If we really want to push our exports, we really need some form of export guarantee. It’s a difficult job for the average agricultural exporter to hop on a plane, go around the world and negotiate prices and then make sure they get paid.”

Others do more

The New Zealand Export Credit Office offers short-term trade credits (arising from non-payment by foreign buyers) and loan guarantees – but other countries offer much more to encourage the financial backing of exporters.

For instance, Canada’s Export Guarantee Programme guarantees up to US$25 million to an exporter’s financial institution to extend their line of credit or provide term loans.

“If we want to retain our standard of living as a first-world country, we have to make significant changes in our economy. The countries going ahead are those selling more than they’re buying. That’s it, in simple terms,” says King.

Stimulating more competition from challenger banks and so-called non-bank deposit takers would also help. A good start, says King, would be to ensure that these financial institutions aren’t subject to more regulatory measures than the big banks face.

“The smaller banks and the non-bank deposit takers should not be disadvantaged in any way. Anything that big banks get, the small guys should get,” he says. For instance, General Finance and other finance companies are required to hold their deposits with a bank. But the big banks can deposit their unallocated funds with the RBNZ to receive the official cash rate of interest.

“ANZ or ASB might give me 4.5 per cent interest. But if those banks have spare money overnight, they can deposit it with the RBNZ and get the official cash rate (OCR) which is currently 5.5 per cent.”

Due diligence

General Finance will make submissions to the rural banking inquiry and will continue to encourage the government to stimulate competition in the banking sector by allowing challenger banks to “gain the critical mass and cost structure” that would allow them to diversify their investments into more productive parts of the economy.

In the meantime, King says the high interest rate environment remains attractive for those with cash on hand and looking for a decent return on their investment.

“The consensus is that interest rates will come down but probably at the end of the year or early next year, so locking in a higher rates now for the term that is appropriate for you is probably a smart thing to do,” he says.

But looking beyond the cosy oligopoly of the big banks, term deposit holders need to do their due diligence on finance firms offering term deposits, including examining the type of investments companies are making, and the risk profile attached to those investments.

Says King: “What loans are your deposits funding? Does the company have a good track record and good governance? What is its credit rating? These are the questions you need to ask. At General Finance, we make all of that information accessible and transparent so you know exactly where your money is going.”

The information contained in this article is general in nature . It is not intended to constitute financial advice and does not take your individual circumstances into account. We recommend that you seek assistance from an appropriate financial professional.

For more information visit generalfinance.co.nz/service/deposit-rates/