Our Insights

Real Solutions for the Rural Banking Inquiry

Jul 2, 2024 9:14:05 AM / by Andrew Laming



Information only disclaimer. The information and commentary in this email are provided for general information purposes only. We recommend the recipients seek financial advice about their circumstances from their adviser before making any financial or investment decision or taking any action.

With the official announcement from the NZ government about launching an inquiry into Rural banking, we believe it’s an opportune time to share NZAB’s thinking on solutions that would increase the availability of competitive capital to farmers.

In our last article, we shared our submission to the Primary Production Select Committee. We were subsequently invited to present directly to the committee in person alongside Federated farmers and Rural Women’s Network.  

In that submission, we outlined the problems we saw and the reasons behind them. We purposely stayed away from offering any solutions as we thought it was best to focus on identifying the issues first.

But now, we thought it worthwhile to share some of our thinking on what would increase both the availability of capital and the competitiveness of it.  

In this article, we will touch on changes to “capital regulations” as one solution, but we will also touch on another five things that need to be focused on at the same time. The current capital restrictions that farmers' face is a problem due to multiple factors, not just the current bank settings.  

Equally, changing capital regulations alone won’t solve farmers access to capital – it's only part of the puzzle. And it’s inherently risky if farmers' only focus on one area (capital regulatory change) and put all their eggs in that basket only to find that the RBNZ is unwilling to change.


The prize here is large.

Make no mistake about it - capital restriction due to regulation causes market harm. In the case of Agri, it can lower a farmer’s confidence in investment and even when investment is chosen, it drives up the cost of the capital deployed with it. It also sends the market the wrong signals, leading to asset price suppression, even when the underlying operating performance of the asset class is doing well.

Conversely, as we’ve seen in the home loan sector, it does the opposite – not just funnelling more debt capital into houses, but also investment capital as investors know they’re on a one way bet with rising asset values.

This regulation is creating bubble and bust situations with the classic case being the New Zealand housing market.  

However, get the regulations right and capital will follow the right economics, rewarding those investments that have good economic returns and strong market fundamentals, consistent over a long period of time.


Let’s start with a picture.

As always, we want to start with a graph to paint the picture.

The below graph is the year-on-year percentage growth for Agri Loans, versus Home loans, dating back to 2000.

The point of this graph is to remind everyone that it was commonplace for Agri to have equal access (versus other sectors) to credit. Up until 2016, Agri lending growth closely followed the cyclical nature of all lending in New Zealand, but subsequent to that, you can see the clear re-direction of bank lending towards Home Loans.      


So, what should we do to fix this?

As we highlighted in our submission , the changes to RBNZ capital regulations is a significant driver for the current situation in rural banking, but it isn’t the only one.  

But before we move onto the other factors, let’s start with those capital regulations:

1. Dial back the differential on capital that Banks need to hold between housing and Agri lending.

Whilst the RBNZ and Banks shout at each other, New Zealand Farmers burn.

The RBNZ argues that by increasing the capital held by banks, this will further safeguard the banking system and instead, banks should simply “lower their margins”. New Zealand banks then argue that because of the extra capital, margin costs now need to be higher, otherwise that capital will be “deployed elsewhere”.  

But both seem to be missing the point and maybe conveniently. Its not necessarily the amount of capital overall that each bank needs to hold, but the relative differential of the amount of capital between housing and farming loans.

To illustrate this with an extreme example, if RBNZ decided to halve the amount of capital required to be held by each bank but hold the capital differentials between the two types of lending the same, you would still have banks favouring home lending over agri lending because of relative attractiveness (this is not to say this wouldn’t work, as all margins would go down, but home loans would still remain the more attractive lending options for Banks, sending the market the wrong signals).

None of the above is to say that Agri loans aren’t riskier than home loans – but having to hold double the capital is too much given the historically low bank lending losses in the sector.

Ironically, better availability of debt capital from the Banks (and from all sources for that matter) is self-de-risking. Ultimately it encourages asset value growth, competition for farmland purchase (and hence better farm sale liquidity) and greater investment into productivity or higher profit land use change - all of which leads to less lending losses.

But we don’t see that changing the bank capital settings as the only thing that the Rural Banking Inquiry should focus on; we also see five other key things that that the inquiry should turn its sights on.


2. Encourage existing New Zealand lenders to participate in Agri.

There are plenty of "deposit taking non-main bank lenders" that are very active in the home loan space (and the list is growing significantly) – but are actively discouraged by even higher Agri lending capital ratios than what the main banks face.

We understand that the capital ratio requirements for non-main bank deposit taking lenders, when lending to Rural, are at significantly higher levels than main bank levels and versus home lending. This provides little incentive for these institutions to consider lending to farmers.  

As an example, if a non-bank lending institution was forced to put near 100% of its own equity capital against a farm loan versus say 25% for home loan, they would be able to write four times the dollars of home loans than they could for one dollar of Agri Lending.   That’s not particularly incentivising for these lending businesses as they look to scale.

These rules, designed to make the system less vulnerable for depositors, have gone too far and are creating an effective oligopoly for the main banks with new entrants unable to enter and compete.

Also - there’s Kiwibank, who doesn’t currently lend to Agri and are restricted by doing so because of capital regulation. We wrote this thought piece about why Kiwibank doesn’t lend to farmers and how it could be re-purposed as a massive engine for access to capital for both Business and Agri.  


3. Encourage new private capital lenders to New Zealand.

There is a vast amount of private credit funds around the world, accumulating on the back of growing super funds and other private capital collecting in funds.   In the US, more cash deposits now flow into these funds than regulated banks.   In turn, these funds now lend directly to individuals, businesses and agri as they look to capitalise on this straightforward type of capital placement and return.

There is a heightened awareness from these funds about the need to invest in Agriculture around the world given the real asset base and long history of stable returns - matching perfectly the funds need to invest for long periods of time at stable returns, with low risk of default.

Looking to our neighbour's, and as of 2023, global pension funds' had a combined investment allocation AUD 24b in Australian agriculture.

Whether it be equity or debt, these pools of capital are very interested in New Zealand agriculture. Imagine what it would do to farmer confidence and market liquidity if, say, $5bn from a new lender came into New Zealand agriculture?

NZAB has direct access to a number of lending and equity pools in the private credit space and we will share more about our growing capability in this area in upcoming articles.  


4. Encourage more foreign direct investment into New Zealand agriculture supply chains.

We wrote an article about this back in November last year, calling for a closer look at New Zealand’s FDI settings given the majority of economic data confirms that foreign direct investment (FDI) is advantageous to those countries that receive it.

FDI is not simply about acquiring New Zealand land, it’s about pairing with New Zealand companies to encourage further investment into technology (for more efficiency and to create consistent high value products in high value markets), greater access to new and higher value markets, access to new expertise and management skills, further confidence to invest into research and development, and regional invigoration and job creation.

Further offshore capital will mean that farming businesses will increase in attractiveness as an asset class, in turn attracting more capital – including domestic capital. It becomes self-fulfilling.

The government has already indicated a willingness to smooth the process for overseas investment with a new directive issued this month to the OIO, detailing a clear shift in policy to strongly encourage overseas investment, a greater focus on economic benefits, and a general streamlining of the OIO application process with applications to be considered in under half of the statutory timeframe.    It will be interesting to see upcoming precedents created by this directive.


5. Make New Zealand a great place to do business with consistent long-term policies that encourage business creation and growth.

This is a more general comment, but even if capital is available, it won’t invest unless New Zealand is an easy and consistent place to do business. This means appropriate regulation and business settings that encourage and reward business growth.  

This means balanced labour, environmental and consenting laws so that when capital arrives, it can be turned into something that represents prosperity and growth.  

Balanced settings are only part of the equation, they need to be consistent over decades as well.  Those with capital won’t invest now, if they think that any positive change in investment settings might again change negatively in the near future with a change in government. The same goes for consenting regulations – if a land use activity or access to resource has a re-consenting requirement in less than <5-10 years, then that makes commercial investment difficult – as the investment return profile would then need to fit within that window.  


6. Farmers need to adopt a more business competitive mind frame when dealing with their banks.

Whilst there is a capital gap in NZ agriculture, the banking environment is still quite competitive for the right type of Agri transaction.

Part of this is ensuring that, in a banking sense, your business is one that a new bank wants to bank (i.e. acquire as a new customer), or one that your existing bank doesn’t want to lose.

This does not mean that you need to start shopping around from bank to bank (and that can be a long winded activity), but instead, this is more about knowing how good your credit is, the things you need to do to improve it (if at all) and how well you have presented this to your bank. In most cases all of these things are required.

The credit process is equal parts objective (numbers and results) and subjective (judgement on people, past and strategy). Your current business performance, on farm resources, future strategy, decision making experience and skill and past financial history can be open to a very wide range of interpretation unless it has the required analysis, justification and narrative.  These and more are all factors in a credit decision that leads to either a “yes” or a “no” or a wide range of interest rate outcomes.

Too often, farmers have not been able to present this well enough to their bank, or at times are uncomfortable pushing for what they might deserve with their interest rates.

Speaking “bank” isn’t easy these days, nor is understanding what a competitive rate looks like so getting a professional to help in this process is important 


So, to wrap up.

The solutions to the scarcity of capital in New Zealand Agri are not of one dimension and will require a multi-pronged approach to be successful. However, the solutions aren’t difficult, and excitedly, many of them are already underway . Done well, they won’t just benefit farmers, but New Zealand as a whole with greater exports, more GDP, further job creation and the ongoing invigoration of regional New Zealand with allied business growth, supporting the sector.  

Our New Zealand farmers are highly skilled, resilient and have excellent on farm resources with great market access. They deserve free access to abundant capital to allow them to fully capitalise on the massive ongoing opportunity to take New Zealand’s fine food and fibre to the world.

Who is NZAB?

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Farming’s very complex and you can’t be an expert in everything. That’s why the best farmers gather a specialist team around them. Our specialty is better banking outcomes for our clients.

There’s no one better to work alongside you and your bank. With a deep understanding of your operation and our considerable banking expertise, we can give you the confidence and control to do what you do best.

We’ve been operating for over five years now and we’re right across New Zealand, For an introductory no cost chat, pick up the phone and talk directly to one of our specialists on 0800 NZAB 12.    

Or if you prefer, Visit us at our website  or email us directly on info@nzab.co.nz  

Tags: Debt, Action, Planning, Budget, Banking, Strategy

Andrew Laming

Written by Andrew Laming