There has been much published on the issue of the proposal by the Reserve Bank to require banks to build up their capital reserves to better enable them to withstand any future financial crisis.
Should the Reserve Bank manage to implement the proposal following the completion of its review and analysis of the submissions recently received (which will not be known until November), the banking sector would need to raise more than $20 billion in additional capital.
That would likely translate to increased loan costs and reductions in loan capital, which would have an enormous impact on many sectors, but perhaps none more so than the farming sector.
Parallel to the Reserve Bank's review, but not arising solely from it, the Government has now proposed a new scheme to help farmers in financial distress deal with their lenders.
It is hoped that the scheme will level the power imbalance between banks and farmers ahead of the proposal requiring banks to bolster their capital reserves.
The Farm Debt Mediation Bill (No 2) would establish a mediation scheme requiring creditors with secured interests in farm property (including non-bank lenders) to offer mediation to farmers before taking an enforcement action in cases of default, such as putting farms into receivership or liquidation.
Farmers could also initiate mediation with creditors. The bill would apply to all secured farm debt (including existing debt at the time of establishment of the scheme), but not unsecured creditors and the IRD.
It would initially apply to farming operations engaged in agriculture, horticulture and aquaculture, with potential expansion into other areas.
A creditor would not be able to take enforcement action (including service of Property Law Act notices, appointment of a receiver or exercising a power of sale) in relation to farm property unless the parties had undertaken the required mediation process and the outcome of that process was known.
The introduction of the bill is timely and would provide some redress to the current power of lenders.
While the scheme would not guarantee a farm business could be saved when facing financial hardship, it would present an option for a negotiated settlement for farmers who can be rendered financially vulnerable due to factors outside their control such as weather, market price volatility, or diseases such as Mycoplasma bovis.
Many rural bank managers already work closely with farmers facing financial challenges, which allows early identification and management of some triggers of potential insolvency.
The scheme will mean that banks will need to continue to focus on their management of client relationships.
The Restructuring Insolvency and Turnaround Association of New Zealand (RITANZ), an organisation that represents insolvency practitioners, notes that it would like to see the scheme expanded to cover more than just farmers as other business owners might find themselves in a similar position.
While that observation is valid, farmers are in a somewhat unique position as the failure of a farm business can lead to the loss of both a business and a home, which might have been in a family for many generations.
Further, the country's rural debt is approximately $63 billion, up 270 per cent from 20 years ago according to Agriculture Minister, Damian O'Connor.
The bill will now be fine-tuned through the Select Committee process, which should include distinguishing between family-owned and operated farms (whose interests the bill is primarily concerned to protect) and corporate/institutional farming operations who have greater bargaining power with their lenders.
MPI, who will administer the scheme, expect the Bill to become law by the end of the year, with the mediation scheme to be available from October1, 2020.