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Friday, 20 March 1987
Page: 1264


Mr COBB(3.45) —I wish to relate an unfortunate story of two constituents in my electorate who I believe have been treated very badly by the head office of the Commonwealth Bank in Sydney. The people I am referring to are Mr and Mrs Robert Senior, of `Rusmar', Forbes. In addition to running their Forbes property, this couple some time ago took over the management of a family property at Brewarrina. To be able to finance the upgrading of the property with improved stock, fencing and so on they took out a loan of $170,000 with the local bank there. It was a farm development loan over a term of 15 years. The interest rate of the loan was to be adjusted on a yearly basis and for the first year of this loan was set at 19 per cent. However, last year the bank increased that rate to 20 1/4 per cent, which meant an annual interest repayment, excluding bank charges, of $34,425.

Robert Senior happened to be talking to the manager of the State Bank in Forbes one day who said he could finance the same loan for 17 1/4 per cent, some 3 per cent less. Naturally, Mr Senior was grateful to find that competition apparently does exist between banks in this country and he accepted the offer. His annual interest bill would drop to $29,325, a saving of $5,100 a year or almost $100 a week. As the Senior family had been living on only $100 a week themselves, they were grateful for this windfall. The State Bank paid out the original loan to the Commonwealth Bank and all seemed well. However, in the fine print accompanying the terms and conditions of the original loan that the farmer signed with the Commonwealth Bank is a clause which states:

In the event of prepayment or partial prepayment of principal to the Bank, the Bank shall at its option be entitled to an early repayment fee not exceeding the equivalent of 3 months interest on the sum so paid . . .

I do not have to tell honourable members that the bank applied this full penalty of $8,463, which I believe is a draconian and outrageous impost.

Let me stress the point that the bank should be entitled to charge some penalty if it so chooses, as it now has the expense of reallocating that money elsewhere. Possibly $500 or $1,000 would have been a reasonable charge. Alternatively, it could ask for three months notice. However, to hit this struggling farming couple with the full force of the small print clause penalty of almost $8,500 is bordering on being vindictive. All banks and finance companies have penalty clauses in their contracts, but in a ring-around in my electorate I have yet to find one other bank that has ever applied the penalty. The banks usually waive the penalty because of the bad public relations it would cause to apply it. However, all approaches to head office in Sydney to have this case treated in a similar manner have met with stony refusals.

I believe that the three-month penalty clause is outdated. It would have been put in contracts years ago when interest rates were only a quarter of what they are now. Today with 20 per cent interest rates the penalty is magnified beyond all reasonable bounds. The practice is clearly outdated and should be amended. In fact, I doubt that such a usury charge would stand up in a court of law. When the penalty is set at this high level it also has the effect of virtually eliminating any competition between banks for clients. More than ever before healthy competition is necessary and desirable. To remove this competition by the use of such a clause in a contract almost borders on collusion. A letter to me from the bank's Sydney head office stated:

The option is exercised invariably in cases such as this one where a term loan is being retired from finance from other institutions.

Apparently, if a person can pay the loan off himself because he has won Lotto or something the bank will be lenient, but if he has someone else pay it off because he can get a better deal elsewhere, it will invariably screw that person to the limit. From this unpleasant experience, I would advise everyone taking out a loan to discuss very carefully the full implications of such clauses and possibly to insist on having the interpretations delivered in writing.

It is of course common for banks to come in for criticism for the high interest rates they charge. They are also criticised for making excess profits. I believe those criticisms are unfair. It is government policy, not the banks, that sets the high interest rates, so it is the Government which should get the blame. Nor are the profits excessive. The main banking groups in Australia such as Westpac Banking Corporation, National Australia Bank Ltd, Australia and New Zealand Banking Group Ltd and the Commonwealth Banking Corporation all make annual profits in the order of $300m. That may sound a lot, but it translates into a return on assets of only around one per cent, hardly what I would call a rip-off. We should not be worried that the banks are making profits. Rather we should worry when they do not make profits. People do not realise that, if the banks lent out money and made no profits at all, interest rates would drop only a couple of per cent or so. Squeezing bank profits will not solve the high interest rate problem, but changing government policy, and better still changing the Government, would. In fact, it could be said the banks would make roughly the same profit whether the interest rates were 5 per cent or 25 per cent. From that point of view it is only their margin that we should be concerned about here, and I do not believe that that is excessive.


Madam SPEAKER —Order! The honourable member's time has expired.