Banks' rural credit decisions will increasingly depend on sustainable farming practices, not land value, says the country's biggest rural lender ANZ Bank.

Commercial and agriculture managing director Mark Hiddleston said ANZ's credit decisions have for some time been based more on farm performance than the traditional 65 per cent land-to-value ratio and that model looks likely to increase in use.

Also due for change he believes is the banking sector's use of "a lot of averages".

"You have the 'average' dairy farmer, the 'average' sheep and beef farmer, but now with better use of data, better financial reporting out of the sector, I think averages are dangerous," said Hiddleston, who is also on the Government's interim climate change committee.

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"They probably discount the really good farmers - the proactive ones, the ones using precision farming, the more accurate and the more productive. (With averages) you under-value them and probably inflate the performance of the poorer and lower performing ones.

"For those using science and technology to be more precise in the way they run their businesses, you will see that performance element playing a bigger role in credit decisions."

But surely banks need to lend farmers money to buy that technology?

"Within the margin," said Hiddleston.

The days of "massive tracts of capital" with "huge amounts of leverage" funding dairy conversions were over, he believed.

"There will be trading - those at the end of their careers who purely by age are saying it's time to pass the baton on to the next owner to the next owner. And the next may be more corporate-type farming."

Some "really good energy" was coming into the sector via property consolidation, he said.

But a challenge was how to restore confidence in the primary sector to attract that energy.

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"There's a need for the operator, the farmer, to be more open to advice, open to technology, open to trying new things. We want to make sure we attract talent into the sector to do that - and to do that you need confidence in the sector."

Given Hiddleston's job takes him regularly deep into the regions, the Herald asked him about rural confidence.

"If you sit down with them, yes, payouts are better and cash is starting to come in and that's positive - then there's the 'but'.

"It's not that farmers are afraid to lean into some of these challenges - where the confidence is lacking is uncertainty in terms of what does 'good' look like and what is the pathway of getting there?

"Those with a real role to play here - the ANZ, producers (processors), local councils, really have to start upping their game in terms of what does 'good' look like?

Farmers needed this defined "today" along with what they had to do to get in the right position, Hiddleston said.

"We have to think quite differently otherwise you just have headwind, after headwind, after headwind and you're trying to make these quite meaningful changes ... so we're asking what are the carrots?

"How do we incentivise and motivate good investment and good decisions?"

Hiddleston said biosecurity issues, such as the cattle disease Mycoplasma bovis and the as-yet-unknown result of a nearly $1 billion Government attempt to contain it, were also hampering confidence.

"There's a wait-and-see element. Again people are saying 'I know practices will change but I'm not sure how'.

"No-one is denying things need to change but there's just not the clarity around how. Let's face it, farmers are doing it already. They want to get on with it, they're not afraid of
droughts and floods, they're really resilient ... but when you put up a bucket of grey, it's really hard for them to see the bottom."

Hiddleston said in his role on the interim climate change committee representing the financial sector he's also pushing for clarity for agriculture.

"You can't just point this at farmers - everyone in New Zealand needs to take ownership around these issues and play a role."

The financial industry and local authorities needed a clearer understanding of "good" environmental practice and how to work together towards it.

"(But) if you think about sustainability issues, at the moment on-farm in each region they are quite different in terms of understanding. Therefore, confidence in making investment towards more sustainable farming practices is harder because of that lack of clarity."

Hiddleston said the Reserve Bank had a part to play.

"How do they encourage 'good'? That might be if (a bank) is lending to people or businesses that are making the changes that are good for the New Zealand economy and good for the environment, then maybe we could hold less capital round those loans because they are less risky in the long term?"

The Reserve Bank is reviewing its rules around how much capital trading banks must hold against loans.