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Thursday, 11 October 1984
Page: 1695


Senator PETER RAE(6.38) —I support what Senator Watson has just said. I believe that the honourable member for Hunter (Mr Robert Brown) should either put up or shut up. He should publicly apologise if he does not have anything better to support his allegations than that which he has displayed so far. But that is not what I rose to talk about tonight. I rose to talk about the letter I received, dated 30 September 1984, from the Acting Treasurer, Mr Chris Hurford, which states:

On 9 November 1983, during the debate on Appropriation Bill (No. 1) . . . and again on 16 November-

the letter refers to a Senate Hansard-

you asked the Minister representing the Treasurer in the Senate . . . a number of questions relating to the Primary Industry Bank of Australia. You also wrote to the Treasurer concerning this on 28 March 1984.

In other words, I have been seeking information for some time in relation to the operation of the Primary Industry Bank of Australia. I received a reply from the Minister on 30 September 1984. The Acting Treasurer does say:

I regret the delay in responding to your enquiries.

I shall seek leave in a moment to incorporate in Hansard the whole of that letter.

I briefly draw attention to the fact that I still do not understand, notwithstanding the matters set out in the letter, why the Primary Industry Bank of Australia has to charge somewhere between 0.75 per cent and 1.5 per cent more than the prevailing rates for mortgage moneys for similar types of loans other than those which apply simply because there is an element of longer term loan. If it was a longer term fixed interest loan, one would be able to say that there was some justification, because quite obviously one would have to be an extremely adventurous banker to lend money for a long period at a fixed interest rate. Where the interest rate is adjusted according to market rates applying at the time, I do not understand why PIBA is entitled, and believes itself to be entitled, to charge an extra and significant fee to the farmers of Australia because the loans are slightly longer term than might otherwise be in most of the normal commercial areas. I seek leave to incorporate in Hansard the answer received from the then Acting Treasurer dated 30 September 1984, a document I have shown to the Attorney-General (Senator Gareth Evans) and which I believe to be suitable for incorporation in Hansard.

Leave granted.

The letter read as follows-

Acting Treasurer Parliament House Canberra 2600 30 September 1984 Senator P. E. RaeParliament HouseCanberra ACT 2600

Dear Senator Peter Rae On 9 November 1983, during the debate on Appropriation Bill (No. 1) 1983-84, (Senate Hansard pages 2417 and 2418), and again on 16 November, 1983 (Hansard page 2653) you asked the Minister representing the Treasurer in the Senate (Senator Walsh) a number of questions relating to the Primary Industry Bank of Australia. You also wrote to the Treasurer concerning this on 28 March, 1984. I regret the delay in responding to your enquiries.

The Treasurer has asked me to provide the following information in response to the matters you raised:

(i) Is it the policy of the Primary Industry Bank of Australia (PIBA) that approximately ten per cent of its total investible funds be invested in short- term securities of various forms as opposed to investment in primary industry?

In asking this question reference was made to the level of loans to authorised dealers ($14.27 million) and bills of exchange etc ($50.72 million) as detailed in the Primary Industry Bank's balance sheet as at 30 June 1983. It is, of course standard and prudent banking practice for banks to maintain an appropriate level of liquid funds to meet contingencies. Funds held overnight by the Bank with authorised dealers are to meet settlement of exchanges. The category ''Bills of exchange and other short term investments'' represented funds held by PIBA to cover (a) long-term loans to the primary sector, amounting to some $39 million as at 30 June 1983, which had been approved but not drawn down; and (b) deposit liabilities maturing in the short term. It should be noted that the actual timing of loan draw-downs rests primarily with agricultural end- borrowers and, once having approved a loan, the Bank must stand ready to provide the relevant funds.

(ii) Is it not a fact that the most expensive first-mortgage money a farmer can borrow in Australia to day is through PIBA-PIBA rates have been to, I think, 17. 5 per cent per annum, certainly 17.25 per cent per annum, in the past six months -and, if PIBA money is the most expensive, is it not failing in the primary purpose for which it was established?

The bank was formed for the specific purpose of providing a long-term finance facility for primary producers in Australia. The terms of PIBA loans range from 8 to 30 years.

Because of the long-term nature of PIBA's loans it is appropriate that the Bank 's interest rates carry a margin relative to short-term overdraft facilities provided by trading banks. The bank's interest rates are regularly reviewed in the light of market factors. The end-borrower rate for large loans (ie $100,000 and over) is adjusted broadly in line with movements in major trading bank large overdrafts and the end-borrower rate on smaller loans (ie up to $100,000) has been adjusted to accord with movements in major trading bank small farm development loan interest rates. For interest, reflecting the general downward movement in interest rates in the last half of 1983, the bank reduced its lending rates on several occasions. In the first half of 1984, there was an upward adjustment in PIBA lending rates in line with the general increase in interest rates. PIBA lending rates have since eased in line with more recent market trends.

Maximum end-borrower interest rates in early September were 15.25 per cent per annum for loans of $100,000 and above, and 14.5 per cent per annum for loans up to $100,000. Interest rates charged by the major trading banks for loans of $100 ,000 and above for 'prime' borrowers, in the same period, were 13.75 per cent per annum, with higher rates being charged in other cases. Interest rates charged by the major trading banks on loan of up to $100,000 in early September were up to 14.5 per cent per annum.

In summary, the bank's lending interest rates have traditionally been close to those applying to farm development loans provided by the major trading banks and are regarded as being favourable, having regard to the longer-term commitment of the loan.

Your suggestion that there is a particularly large margin between PIBA's borrowing and lending rates is not correct. PIBA obtains the bulk of its funding needs at commercial rates and, as already noted, its lending rates are regarded as being favourable when compared to rates charged by the major trading banks on farm development loans.

(iii) Why are PIBA rates so high when a large proportion of the borrowings, including Commonwealth deposits (at 10.2 per cent per annum) and Eurodollar certificates of deposit, are at a very much lower rate than PIBA loan rates, and yet the profit declared for the year ended 30 June 1983 is a very modest one?

The outstanding balance of Commonwealth loans to PIBA-the present mechanism for providing Commonwealth assistance to the bank-has been reduced, by scheduled repayments by the bank, from a total of $101 million to approximately $59 million at the present time. Although the interest rate on these loans is concessional when compared with market levels, the loans represent only a small proportion of PIBA's total liabilities of over $800 million.

The cost of PIBA's other borrowings varies to reflect commercial rates. For example, in 1983-84 interest costs on domestic public borrowings ranged from 11. 8 per cent to 14.25 per cent, depending on maturity. Interest rates on overseas borrowings in 1983-84 were effected at broadly similar levels. In early September the interest rates on public deposits with PIBA ranged from 11 per cent for a 6 months maturity to 12 per cent for a 4 year maturity. The relationship between borrowing costs, lending interest rates and profitability is reasonable compared with other banks. PIBA's ability to tap domestic and international markets at competitive rates supports this judgement.

(iv) What are the details concerning PIBA's A$40 million offshore bond issue launched on 10 October 1983? In particular, what is the rate of interest, is it variable rate interest, and does it have a currency hedge?

This was a 5 year bond issue at par, carrying a coupon interest rate of 13.625 per cent per annum. The lead manager of the issue was Oirion Royal Bank Limited, of London, a wholly owned subsidiary of the Royal Bank of Canada. The issue was listed on the Luxembourg Stock Exchange. A currency hedge was not, of course, required in this instance because the issue was denominated in Australia dollars . It is the bank's policy that the total all-up cost (including hedging etc) of overseas borrowings should not exceed the cost of a comparable domestic borrowing.

I am sending a copy of this letter to Senator Walsh for his information.

Yours sincerely

CHRIS HURFORD