Banks overdraft rates remain stubbornly high
Farm overdraft interest rates remain stubbornly high, despite major cuts to the New Zealand Official Cash Rate (OCR) and steep falls in 90 day interest rates.
The latest snapshot survey by Federated Farmers of 123 members revealed the average farm business overdraft rate had been reduced by just 54 basis points since the end of January. This survey was conducted between 17 and 25 February 2009, three weeks after 150 basis points were cut from the OCR on 29 January. The survey discovered that the average overdraft rate for farm businesses was 9.62 percent.
“Since 4 December 2009, 300 basis points have been cut from the OCR and 90 day interest rates have fallen from 5.36 percent to 3.04 percent. Yet farm businesses, on average, have seen only 156 basis points of this translated into their overdraft facilities,” says Don Nicolson, Federated Farmers President.
A number of farmers reported in the survey that they had been notified in mid-February that further cuts were on the way from 3 March. This is great news, but many were frustrated with the period of time it took for the cuts to come into effect. With further steep cuts to 90 day interest rates in recent weeks, the banks must urgently review their lending rates and quickly implement any cuts.
Farms are highly seasonal businesses and overdraft interest rates are crucial for farmers’ cash-flow. High interest rates are squeezing farm profitability and mean farmers have less to spend in their local economies.
“In the case of Fonterra, it has changed the structure of this season’s payout. Part of the value return component due in April has now been folded into one payout in October. Incremental payouts due to farmers have also been delayed until the end of the season in June,” Mr Nicolson continued.
“As for the Westland Dairy Cooperative, it is now expected that there will be no winter payout for their supplier shareholders.
“While seasonal and overdraft facilities make up a part of the $44 billion lent to the agricultural sector, stubbornly high interest rates at this point in the economic cycle only serve to frustrate farmers.
“The Reserve Bank’s February Retail Interest Rates on Lending and Deposits highlights the rapid drop in what residential mortgagees are paying, which is down by 414 basis points since August 2008. Although we are not strictly comparing like with like, farmers are concerned that residential mortgage holders are enjoying the fruits of intense competition while farm businesses are not. This is occurring as the banks face pressure from Federated Farmers and Reserve Bank Governor, Dr Alan Bollard. The aim must be to share these benefits with farmers and other small businesses,” Mr Nicolson concluded.
Federated Farmers is keen to see greater transparency and competition in the farm and small business lending markets. We are willing to discuss these prospects with the banking sector and, if needed, the regulators.
OVERDRAFT INTEREST RATES – January OCR follow up
RESULTS
The results of the first Federated Farmers survey showed that farmers overdraft interest rates had fallen by 0.78 percentage points in response to the 150 basis point cut in interest rates on 4 December.
Since then the Reserve Bank has again cut the OCR by 150 basis points (on 29 January) and Reserve Bank Governor Alan Bollard has repeated his call for banks to pass on interest rate cuts to their customers, saying …"To ensure the response we are seeking, we expect financial institutions to play their part in the economic adjustment process by passing on lower wholesale interest rates to their customers.”
The new survey was in the field from 17-25 February 2009.
Federated Farmers received 123 usable responses to the survey from its focus group of farms. We consider this to be an adequate response rate.
The average overdraft interest rate faced by farmers on 29 January 2009 was 10.16%. At the time the survey was conducted (17-25 February 2009) the average rate was 9.62%.
Therefore, the average difference between the respondents’ overdraft interest rates on 29 January and when they responded to the survey was 0.54 percentage points. This means that just over one third of the 1.5% cut to the OCR on 29 January has been passed on to farmers through their overdrafts.
Broken down by farm type:
· For Meat & Fibre farmers (n=42) the average difference was 0.67 (from 10.13% to 9.46%).
· For Dairy farmers (n=41) the average difference was 0.48 (from 10.06% to 9.58%).
· For Arable farmers (n=6) the average difference was 0.22 (from 10.75% to 10.53%).
· For other/mixed farmers (n=35) the average difference was 0.50 (from 10.22% to 9.72%).
NOTE: Some respondents mentioned that their bank had announced plans to decrease their overdraft rates in the future. However, this survey only accounted for rates at the time of the response.
The survey also asked… “Does your bank charge an additional margin rate(s) above the base rate?”
· 50% of respondents said NO
· 30% respondents said YES
· 20% of respondents either did not know or did not respond
Of those who answered yes and responded with a single number, the average margin was 1.29 percentage points.
The survey also asked… “Have there been any further changes to the conditions of your loan?”
· 76% responded NO
· 6% responded YES
· 19% did not respond
Combining the results of the first and second Overdraft Interest Rate Surveys we find:
On 4 December 2008 the average overdraft interest rate for farmers was 11.18%.
On 17-25 February (at the time the second survey replies were received) the average overdraft rate for farmers was 9.62%.
Between 4 December 2008 and 25 February 2009 farmers’ overdraft interest rates have fallen by 1.56%. This is just over half of the 3% fall in the OCR during this period.
When we break this down by farm type we find:
· For Meat & Fibre farmers the average difference was 1.58 (from 11.04% to 9.46%).
· For Dairy farmers the average difference was 1.67 (from 11.25% to 9.58%).
· For Arable farmers the average difference was 1.14 (from 11.67% to 10.53%).
· For other/mixed farmers the average difference was 1.39 (from 11.11% to 9.72%).
APPENDIX – OVERDRAFT INTEREST RATE SURVEY QUESTIONS
1. What was your overdraft interest rate on 29 January 2009?
2. What is your overdraft interest rate now?
3. What is your farm type? (e.g. dairy/sheep/arable)?
4. Does your bank charge an additional margin rate(s) above the base rate? If yes, please specify:
5. Have there been any further changes to the conditions of your loan? If yes, what?
The latest snapshot survey by Federated Farmers of 123 members revealed the average farm business overdraft rate had been reduced by just 54 basis points since the end of January. This survey was conducted between 17 and 25 February 2009, three weeks after 150 basis points were cut from the OCR on 29 January. The survey discovered that the average overdraft rate for farm businesses was 9.62 percent.
“Since 4 December 2009, 300 basis points have been cut from the OCR and 90 day interest rates have fallen from 5.36 percent to 3.04 percent. Yet farm businesses, on average, have seen only 156 basis points of this translated into their overdraft facilities,” says Don Nicolson, Federated Farmers President.
A number of farmers reported in the survey that they had been notified in mid-February that further cuts were on the way from 3 March. This is great news, but many were frustrated with the period of time it took for the cuts to come into effect. With further steep cuts to 90 day interest rates in recent weeks, the banks must urgently review their lending rates and quickly implement any cuts.
Farms are highly seasonal businesses and overdraft interest rates are crucial for farmers’ cash-flow. High interest rates are squeezing farm profitability and mean farmers have less to spend in their local economies.
“In the case of Fonterra, it has changed the structure of this season’s payout. Part of the value return component due in April has now been folded into one payout in October. Incremental payouts due to farmers have also been delayed until the end of the season in June,” Mr Nicolson continued.
“As for the Westland Dairy Cooperative, it is now expected that there will be no winter payout for their supplier shareholders.
“While seasonal and overdraft facilities make up a part of the $44 billion lent to the agricultural sector, stubbornly high interest rates at this point in the economic cycle only serve to frustrate farmers.
“The Reserve Bank’s February Retail Interest Rates on Lending and Deposits highlights the rapid drop in what residential mortgagees are paying, which is down by 414 basis points since August 2008. Although we are not strictly comparing like with like, farmers are concerned that residential mortgage holders are enjoying the fruits of intense competition while farm businesses are not. This is occurring as the banks face pressure from Federated Farmers and Reserve Bank Governor, Dr Alan Bollard. The aim must be to share these benefits with farmers and other small businesses,” Mr Nicolson concluded.
Federated Farmers is keen to see greater transparency and competition in the farm and small business lending markets. We are willing to discuss these prospects with the banking sector and, if needed, the regulators.
OVERDRAFT INTEREST RATES – January OCR follow up
RESULTS
The results of the first Federated Farmers survey showed that farmers overdraft interest rates had fallen by 0.78 percentage points in response to the 150 basis point cut in interest rates on 4 December.
Since then the Reserve Bank has again cut the OCR by 150 basis points (on 29 January) and Reserve Bank Governor Alan Bollard has repeated his call for banks to pass on interest rate cuts to their customers, saying …"To ensure the response we are seeking, we expect financial institutions to play their part in the economic adjustment process by passing on lower wholesale interest rates to their customers.”
The new survey was in the field from 17-25 February 2009.
Federated Farmers received 123 usable responses to the survey from its focus group of farms. We consider this to be an adequate response rate.
The average overdraft interest rate faced by farmers on 29 January 2009 was 10.16%. At the time the survey was conducted (17-25 February 2009) the average rate was 9.62%.
Therefore, the average difference between the respondents’ overdraft interest rates on 29 January and when they responded to the survey was 0.54 percentage points. This means that just over one third of the 1.5% cut to the OCR on 29 January has been passed on to farmers through their overdrafts.
Broken down by farm type:
· For Meat & Fibre farmers (n=42) the average difference was 0.67 (from 10.13% to 9.46%).
· For Dairy farmers (n=41) the average difference was 0.48 (from 10.06% to 9.58%).
· For Arable farmers (n=6) the average difference was 0.22 (from 10.75% to 10.53%).
· For other/mixed farmers (n=35) the average difference was 0.50 (from 10.22% to 9.72%).
NOTE: Some respondents mentioned that their bank had announced plans to decrease their overdraft rates in the future. However, this survey only accounted for rates at the time of the response.
The survey also asked… “Does your bank charge an additional margin rate(s) above the base rate?”
· 50% of respondents said NO
· 30% respondents said YES
· 20% of respondents either did not know or did not respond
Of those who answered yes and responded with a single number, the average margin was 1.29 percentage points.
The survey also asked… “Have there been any further changes to the conditions of your loan?”
· 76% responded NO
· 6% responded YES
· 19% did not respond
Combining the results of the first and second Overdraft Interest Rate Surveys we find:
On 4 December 2008 the average overdraft interest rate for farmers was 11.18%.
On 17-25 February (at the time the second survey replies were received) the average overdraft rate for farmers was 9.62%.
Between 4 December 2008 and 25 February 2009 farmers’ overdraft interest rates have fallen by 1.56%. This is just over half of the 3% fall in the OCR during this period.
When we break this down by farm type we find:
· For Meat & Fibre farmers the average difference was 1.58 (from 11.04% to 9.46%).
· For Dairy farmers the average difference was 1.67 (from 11.25% to 9.58%).
· For Arable farmers the average difference was 1.14 (from 11.67% to 10.53%).
· For other/mixed farmers the average difference was 1.39 (from 11.11% to 9.72%).
APPENDIX – OVERDRAFT INTEREST RATE SURVEY QUESTIONS
1. What was your overdraft interest rate on 29 January 2009?
2. What is your overdraft interest rate now?
3. What is your farm type? (e.g. dairy/sheep/arable)?
4. Does your bank charge an additional margin rate(s) above the base rate? If yes, please specify:
5. Have there been any further changes to the conditions of your loan? If yes, what?
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