Irish farmers paying more than fair share of bank interest
They are in the main conservative, lowly geared customers, who have strong track records when it comes to meeting repayments, and low instances of default.
Banks continue to lend strongly to them, with total farmer loan draw-downs over the 12 months to March, 2014 amounting to €587 million — out of a total loan book of €2.2bn to the entire Small to Medium Enterprise sector, according to the Central Bank.
I hear some banking leaders describe Ireland’s agricultural sector as one of their key priority sectors. However, statistics published recently by the Central Bank show that the amount of lending to Irish farmers is falling significantly.
Despite new lending of €318m in the first six months of this year, the total borrowings by Irish farmers have dropped to €3,401m at the end of June, 2014, falling a massive €450m within the quarter from April to June 2014.
This significant drop can, to a large degree, be accounted for by a reduction in seasonal overdrafts, as milk production kicks in. Looking at this drop in borrowing over such a short time frame, it is difficult to extrapolate any real trend in the borrowing habits of Irish farmers, and it would be fairer to draw comparison between June 2013 and June 2014 figures, which equally show a sizeable drop in the borrowing levels of Irish farmers.
The June 2013 figures suggest Irish farmers were in debt to the tune of 3,886m; 12 months on, the June 2014 figures, as mentioned above, stood at 3,401m.
Graphing the debt position of Irish farmers over the past four years (see above), shows steady de-leveraging of debt since 2011, but it picked up pace significantly in the past six months.
Each line in the graph represents the debt level of Irish farmers over the years 2011 to 2014. The figures point clearly to a de-leveraging, or reduction in overall debt, by Irish farmers, with significantly more old debt being repaid than new debt being taken on.
The reduction of overall debt borne by the sector should correlate with an overall reduction in the risk profile for lending to farmers.
All things being equal, a farmer who has been able to repay debt should be in relatively good order to take on more debt, at preferential loan rates. But on the ground, there seems to be very little positive movement in interest rates, if any at all, in the farmer’s favour.
Instead, it would seem that interest rates applicable to the SME sector in aggregate have been increasing. The Central Bank suggests the applicable interest rates on new loans increased by more than 0.3% over the past three months, standing at a hefty 5.23%.
This figure can be misleading, given that it encompasses the rate applicable for property purchases and other general SME lending such as current accounts and seasonal loans. In any event, the key point is that interest rates charged are increasing, and are significantly ahead of our European counterparts, where lending rates are nearly 1.7% lower than our Irish rates. This hike in interest rates is out of kilter with both a drop in deposit interest rates applicable to Irish savers, and the drop in interbank and ECB lending rates.
Recent deposit rate survey data published by accountancy firm Deloitte highlights that deposit interest rates exceeding 2% are a rarity.
Summarising the latest data, it appears that banks are making higher margins on the backs of Irish businesses and farmers, despite an improving risk profile.
