Kieran Coughlan: EU’s plan for cheaper farm loans
This agreement paves the way farmers to benefit from lower interest rates for farm development loans.
The support will come through a credit guarantee scheme, whereby farm and other rural businesses should be able to access finance easier and cheaper, where the project is partially guaranteed by the EIB.
EU Agriculture Commissioner Phil Hogan has suggested that guarantee funds offers security for loans to be provided by banks or other bodies — typically, for 80% of the value of the loan, which can be of huge benefit to business people, who are much more likely to find that the door of the bank opens when they go knocking.
Unlike a subsidy scheme, whereby the bank rates would be subsidised by the European Commission, the scheme instead takes away some of the risk the banks would otherwise bear and, in turn, it is expected the interest rates charged by the banks should be reduced accordingly.
However, it’s up to each EU Member State to adopt the new financial instruments through their individual rural development programme, and indeed, to make arrangements with local banks regarding access to the scheme.
The benefits can be substantial, with Commissioner Hogan citing a recent Romanian example which allowed borrowers access funds over term loans of between three and ten years, at interest rates of 1.5%.
In contrast, typical unsecured business term loans in Ireland are typically running at interest rates of about 6.5%, with current accounts running about 2% higher, and land loans running about 2% lower.
Statistics published by the Central Bank here showed that the average new loan to non-financial corporations (business loans) had an interest rate of 4.78% in 2014 — a higher interest rate than any of the previous five years, due to banks continuing to increase their profit margins on lending, as they strive to return to profitability.
Across Europe, interest rates for lending to non- financial corporations have been significantly lower, with average lending rates in the order of 3%, and some countries well below this level — and countries like Finland, the Netherlands, Greece, Germany, Poland, Italy, France and Belgium all providing some level of support, whether subsidised interest rates or payback.
EIB Vice-President Wilhelm Molterer has noted that investment within the EU agricultural sector is running 15% behind 2007 levels, and that under-investment in agriculture will in the long term reduce Europe’s farming competitiveness.
The EU’s agricultural productivity grew by just 0.25% per year over the period 2007 to 2012, in contrast to the 1.5% growth per annum over the same period in the US.
The EIB Vice President suggested that the EU’s farmers need a kick-start to become front runners in agriculture, to contribute to economic growth and employment.
The credit guarantee scheme will also be specifically tailored to support young farmers who may find it particularly difficult to access credit, with the EIB Vice-President citing the effectiveness of the French system operated by Credit Agricole as a model example.
From an Irish perspective, the new scheme will need to be adopted into our Rural Development Programme before being launched by the relevant financial institutions — all of which is likely to take a number of months to come on stream.
Although the scheme should help reduce some of the financial cost of borrowing, it looks as though the shortage of competition within the Irish banking sector, coupled with the hangover from our recent financial crisis, will leave Irish farmers still facing higher borrowing costs that our European neighbours, with Irish banks taking higher profit margins than their European counterparts.
