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Economics Legislation Committee

MUNCHENBERG, Mr Steven, Chief Executive Officer, Australian Bankers' Association Inc.


CHAIR: I now welcome Mr Steven Munchenberg from the Australian Bankers' Association. Thank you for appearing before the committee today. Do you wish to make an opening statement or should we just move to questions?

Mr Munchenberg : With the committee's indulgence, I will make a short opening statement.

CHAIR: You know that if you go for too long, I will pull you up.

Mr Munchenberg : I fully know that. Excuse me if I speak quickly. Thank you for the opportunity to appear. Banks have taken a keen interest in the proposal to establish a reconstruction board. We have met with Mr Katter and several of the witnesses who appeared earlier today. It is clear from the legislation and those discussions that the proposed reconstruction board is premised on two things: one that we have a nationwide rural debt crisis and face the imminent end of agriculture in this country and, two, that we can only be saved by significant write-down of debt and government subsidised interest rates to one sector of the economy. We dispute both those claims.

Banks actually have a very positive view of agriculture and its future in Australia—and with reason. The gross value of agricultural production is up 30 per cent over the last four years. Rural exports are worth $40 billion a year—50 per cent higher than they were four years ago. Banks are significant investors in agriculture, with total lending of $60 billion. This represents 8.7 per cent of all loans to business, which is around the 20-year average of farm lending as a percentage of all business lending. The vast majority of farmers do not have a debt problem. Thirty per cent have no debt at all. A further 25 per cent owe less than $50,000. Two thirds of farmers have an equity ratio of 90 per cent or more—that is, their debt is less than 10 per cent of the value of their assets.

That is not to say that there are no farmers in difficulty or families losing their farms and homes, with all that that that entails. The beef industry in northern Queensland has been particularly hard-hit over the past four years through a series of natural and some not so natural events. There was a severe drought across parts of Queensland and into New South Wales. I am happy to discuss these situations and take any questions, but my point now is that we do not have a widespread rural debt crisis. If anything, constant claims that our sheep, cattle, dairy and sugar cane industries are all going straight down the chute at 100 miles an hour only serve to undermine confidence in the agricultural sector.

In relation to the proposed legislation, as we do not have a national or even widespread debt crisis, we do not see any need for the proposed reconstruction bank. We are also very concerned that, were such a proposal to get up, it would have a significant detrimental impact on the ability of all farmers and agribusinesses to access finance which, in turn, will reduce Australia's capacity to benefit from the growing demand for our rural exports.

CHAIR: Thank you very much, Mr Munchenberg. The earlier evidence from the department said that they had been interacting with you and seeking some information which was beyond what your regulatory requirements are to APRA. How do you feel when they ask you to go beyond the regulatory burden that you are required to do? Were you able to facilitate them?

Mr Munchenberg : Certainly—and we did so willingly. APRA's role in collecting data is very much focused on the stability of the banking system. It will only go to a level at which they are interested. We were willing participants in the round table that the Minister for Agriculture organised towards the end of last year. When we were asked to provide data specifically on Northern Queensland, particularly the beef industry and on a number of shires in north-western New South Wales, we were very happy to do that. We were subsequently asked to do South West Queensland as well. That was a little more difficult, but we also provided that data. It was not an easy exercise, as the department indicated quite rightly. Banks operate differently. They are commercial businesses—for example, they will have different criteria for whether a farmer is in default. Getting reconciliation across banks so that we could accurately represent that data was a challenge, but we provided it. We subsequently approached the government about providing more substantive data on a national basis and on a regular basis as well.

CHAIR: You have offered to do that?

Mr Munchenberg : Yes.

CHAIR: Was there anything you could not provide?

Mr Munchenberg : What we cannot do is go down to too low a level of granularity—for example, we have been asked to look at whether we can provide detail on a postcode basis. What the banks tell me is that, particularly in some remote parts of Australia, if you go down to that level, you will be able to identify which farmer is in difficulty. What we have proposed to the government is that we can go to a state level and we can go by agricultural sector. If we get into a situation—for example, with northern beef—where it is clear that there are exceptional circumstances, we would be willing to talk to the government about what further analysis we can do on that particular situation. But in terms of keeping an eye on the performance of farm debt across the country and across different sectors, we are happy to provide that data at a state and sectoral level.

CHAIR: There have been some assertions this morning that banks lent like drunken sailors through the period of the early 2000s and now are using their covenants and the provisions of their loans to somewhat reconcile their risk, and probably the contention is that you are being a bit ruthless. What do you say to that?

Mr Munchenberg : It is a little respond to such vague assertions. Did we do this only in some locations within Australia? Because we know that loans are performing fine across most of Australia, and we know that where there are significant difficulties, there are clear extraneous reasons for that: changes in government policy, for example, or a series of floods, droughts and other pressures. There has obviously been some fluctuation in commodity prices as well. We get a lot of very broad, vague assertions presented to us. It is a little hard to respond when they are broad and vague, but—

CHAIR: I just wanted to offer you the opportunity to respond.

Mr Munchenberg : Were we doing that, you would have expected us to be doing that across the whole country, and there is no evidence of that across the whole country and I cannot see why we would do it only in some segments. It is true, however, that there was a lot of consolidation and expansion of properties—people buying adjacent properties and everything in certain segments—as they sought scale, which is a necessary part of ongoing restructure in the agriculture sector. That is going to affect some sectors more than others. But I do not think it was bank-driven. We are very keen to get our money back, after all.

CHAIR: That is right.

Mr Munchenberg : We get criticised for being too keen in that regard, as well.

CHAIR: In the areas that you did survey, in conjunction with the government and the Department of Agriculture, how many of those farmers were 90 days in arrears—or is this something I should have asked the department?

Mr Munchenberg : Maybe it has published that data that we did provide them but in the case of the northern beef industry, for example, as of the end of last financial year we have 1,258 customers up in northern Queensland. Of those, 43 were 90 days in arrears, which is 3.4 per cent. Not all of those are going to ultimately default, because you can be 90 days in arrears and the bank's assessment is still that you will get through whatever the current difficulties are—and that is our preference, that you get back to being able to service your debt.

CHAIR: Sure.

Mr Munchenberg : Just to fill that out, at that time we had 18 customers in mediation, under the Queensland Mediation Scheme.

CHAIR: So beyond that 90 days. If you are in front of a credit bureau—

Mr Munchenberg : I think that would have included that. I can confirm that if you like.

CHAIR: That includes 18 at the bad bank?

Mr Munchenberg : I would believe so. The 18 in mediation would have been 90 days in arrears before they got to mediation, so I believe that they would have been included in the figures.

CHAIR: Okay. So 3.4 per cent are beyond 90 days.

Mr Munchenberg : Yes.

CHAIR: Is there a likelihood that there is a great percentage, or a percentage, above 3.4 that are actually deferring their crisis by selling down their stock and that revenue coming into the bank—because the banks, quite rightly, as you say, want their money back. Any of the agencies paying in the revenues of the sale of their stock—it goes into their account, and the banks have a habit of saying, 'Well, you can't draw on this, because we want our money back and we don't want you to default.' Meanwhile, you go hungry.

Mr Munchenberg : We are not suggesting that the 43 are the only customers facing financial difficulty.

CHAIR: It seems a very low number, compared to the regions which you surveyed and the problems which I anecdotally know are out there.

Mr Munchenberg : Yes. There are undoubtedly problems out there.

CHAIR: Which is why I say: is this a pipeline issue? If we go back in six months time—

Mr Munchenberg : Over the last few years we have seen the number of customers in arrears increase by about 10 a year; so the trend was upwards, as was the number in mediation. There will be customers who are still keeping up with repayments through selling assets, including stock or other things. Obviously, that is going to have implications for them when and as—because in fact it is happening, as I understand it; the price of the cattle has recovered enormously. Climatic conditions have improved up there, although it is still not ideal. That is going to have implications for the ability to restock as well, and banks are conscious of that. So is that 43 the number of customers that are facing financial difficulty? No but we do need some sort of consistent measure to measure what it is. Our point is that out of all of those customers—and those customers will vary in size enormously as well—it is still a smaller percentage even in the northern beef cattle industry, which has had four years of being smashed about by a whole host of events. We fully understand the extremely difficult situation that that industry is in.

CHAIR: Do you have any idea of what the write-downs have been to banks who have refinanced businesses, families, entities that are in this business in the agricultural sector? Do you have any idea what the write-downs have been if they have been able to refinance with other institutions on those areas that you surveyed?

Mr Munchenberg : No, I do not.

CHAIR: That was never a question that you asked?

Mr Munchenberg : It was not a question that was asked. I am not sure even how much refinancing goes on, because once you are in that situation it is difficult to refinance.

CHAIR: So there is no evidence that out there in the rural land that banks have taken a haircut at all?

Mr Munchenberg : The lack of evidence does not mean that it is not happening. This is why we are reluctant to foreclose—typically when you do foreclose there is no guarantee that you will recover the original debt, particularly if that foreclosure has come at the end of a number of years of trying to manage that loan.

CHAIR: These 43 clients that are in mediation—

Mr Munchenberg : No, 18 in mediation—43 in arrears.

CHAIR: Yes, absolutely. The 18 of them—do you expect that they have been referred to third party practitioners that are advisors, consultants? I have found that banks outsource their audit of entities' viability to receivers and managers.

Mr Munchenberg : That is once you foreclose. Mediation occurs before that.

CHAIR: But the problem is your constituency sends clients out for evaluation with advisory firms that also have as part of their business receivers and managers.

Mr Munchenberg : Yes but that is separate to the mediation process, though.

CHAIR: But it is like being treated for cancer or a life threatening illness and you have good prospects of recovery because the medicine is proven but they send you to the undertaker for second opinion.

Mr Munchenberg : I understand that point but again it is separate from the mediation process. It may be in the receivers' interests to push for receivership but it would not be in the bank's interests.

CHAIR: I find it extraordinary that banks can outsource their responsibility for identifying whether a client is worth reinvesting to somebody else and charge the client for that advisory service, and that advisory company in many case finishes up acting for the bank in selling those people up.

Mr Munchenberg : I am not aware that that is the practice. I have to accept on faith, and I am sure that they are given on faith, your comments about that situation.

CHAIR: You can come back to me on that because I am sure that you could go back and ask that direct question of all your constituency: how many clients have you charged for advisory services to identify the ongoing viability of businesses that have subsequently gone into administration and then receivership and then been sold up by the same company that gave the advice?

Mr Munchenberg : I can understand why the receiver would have a conflict of interest in that situation.

CHAIR: He is not a receiver.

Mr Munchenberg : What his incentive is—

CHAIR: The company is not a receiver at that point. But earlier in the—

Mr Munchenberg : I understand. If the same company is doing the evaluation and, subsequently, can be appointed as the receiver, they may have an interest in undervaluing the property. But I am failing to understand what the bank's interest in having that happen would be.

CHAIR: They do not have any interest. I think it is lazy practice. I would like to see a Chinese wall in there—that the advisory company cannot go on and be a receiver and manage it.

Mr Munchenberg : It is a point I can raise with the agribusiness parts of the banks and see if they have an answer.

CHAIR: It is not just with the agribusiness side; it is with the industrial side; it is with all parts of it. It seems somewhat open to abuse.

Senator XENOPHON: Good to see you again, Mr Munchenberg. In terms of evidence given by the Department of Agriculture of the level of information that is available, they compiled a better picture of rural debt as a result of cooperation with the ABA or with banks. Would the banks have any difficulty in providing that information in a systematic and regular way, whether it is through a memorandum of understanding with the department or through a legislative instrument, so we can get that additional layer of information about the level of rural debt, the level of stress out there amongst farmers and mediations—whether they have been effective or not? It seems to me that there is a gap in information. I am not being critical of banks. I am not being critical of the department. But it seems that if there is more communication then that might give a better picture of what is, indeed, happening out there.

Mr Munchenberg : We would agree that there is a gap in information. There have been other ways of collecting information which have had, for us, serious methodological problems. After the exercise that we did as a one-off last year, we have, in fact, approached the government and suggested that we would provide, on a regular basis, information on the state-by-state basis and on an industry-by-industry basis.

Senator XENOPHON: Because time is short, on notice could you please provide that correspondence to the committee? Would you be able to provide that correspondence?

Mr Munchenberg : We would need to check with a letter to the Minister for Agriculture. But provided he has no qualms with that—I am not aware of the protocol in that case.

Senator XENOPHON: If you could follow protocols and if, for some reason, you feel that you cannot provide it, then the committee can make its own endeavours to provide that—

Mr Munchenberg : If I cannot provide a letter, I can certainly provide you with our views, which are reflected in the letter.

Senator XENOPHON: It is nearly the same way to skin the cat! That is fine.

Mr Munchenberg : I just do not know what the protocol is.

Senator XENOPHON: In terms of the issue of stress, you may be aware of a report by Colin Bettles in Fairfax rural media today about a number of angry farmers surrounding a receiver's car and impounding it. The police were called. It is getting incredibly heated out there. One of the witnesses we will hear from later, as I understand it, around Longreach the local parish priest, the Catholic priest, is aware of 43 farmers on the brink. They are really struggling. Do you think it is fair to say that there is an understated level of distress out there? If you are a farmer who is really struggling but you can somehow just keep up with your payments, you do not necessarily want to let the bank know how bad things are for fear that it may trigger a process that they have no control over.

Mr Munchenberg : I understand that fear. That is the real issue for us because there is a greater chance of us being able to work with a customer in refinancing or adjusting their particular financial situation to help them through difficult circumstances if they come to us early. But I understand why there is reluctance to do that. We are not disputing that there are people out there struggling. We are not disputing that there are people being forced off the land, sometimes after multiple generations of working that land. There are—

Senator XENOPHON: Which is heartbreaking.

Mr Munchenberg : Absolutely. I grew up in the country; I understand that. We are not disputing that. We are not disputing that there are segments of the agricultural sector that are currently in severe difficulty—whether it is because of the drought across Queensland and northern New South Wales or because of the particular circumstances of the beef industry, for example. We do not dispute that. But the proposition of this bill is based on there being some form of nationwide problem. They may be solutions that are needed to be looked at in particular circumstances. But this bill, which would have serious implications for the risk assessment of lending to agriculture across Australia, is a systemic response to an issue that is not systemic.

Senator XENOPHON: You do not see the issue of rural debt and the stress that farmers across the country are facing? I have citrus growers and wine grape growers in my home state of South Australia, and what the grape growers are getting for their grapes is way below the cost of production. It is even worse than last year when it was below the cost of production. I am getting calls practically on a daily basis. They just do not know how they are going to survive when they are getting $100 per tonne less than their cost of production. You do not see that as a broader issue?

Mr Munchenberg : That is a serious issue, and it should be looked at—government policy should be put in place to respond to that. And the banks respond to that; we recognise that these are cyclical industries. A few years ago we had serious troubles in the WA Wheatbelt. That meant that some people left the land, but it also meant that we were able to work with a lot of people through that. I remember back in the 1980s when citrus farmers up around Waikerie and other places were having similar problems. It is not to detract from the problem; it is the fact that these are realities in agricultural businesses, and they are realities for lenders to agricultural businesses.

Senator XENOPHON: Because I am running out of time, I would like you to reflect as to whether you consider that there may well be some systemic issues with respect to this. There are some sectors where the prices have collapsed and asset values go down as a result, and there may be broader issues there. I also have some questions that might be better dealt with on notice, but I wanted to ask: do you consider that Basel III may have implications more deeply for the rural sector, particularly rural debt, given that that is a challenge? We have well-regulated banks here, but in terms of the stress it may put on the rural sector it may be disproportionate to, say, other sectors of the economy.

Mr Munchenberg : The whole basis of the Basel III capital requirements is that your capital reflects the risks you are taking. That is why lending for the Australian housing market is seen as the least risky and therefore it carries less capital. It is therefore cheaper for banks to do than lending to other areas such as business lending, and particular types of business lending, so the capital does have an influence. Ironically, I think the reconstruction board proposal would actually exacerbate that situation because it increases the risks to banks. We have talked to proponents of the bill and we have studied the bill endlessly and, as I understand, what is being proposed is that banks will be forced to write off debt. We do not know when and which customers in advance—we wish we did—but we will not know in advance which customers it is going to affect. So we have to assume that the risk of all customers has increased, and that is potentially going to increase the capital that we have to carry for those loans.

Senator XENOPHON: But you acknowledge the cyclical nature of farming? The issue that I have from farmers I have spoken to is that many times banks do not quite get that in the context of the feast and famine of farming.

Mr Munchenberg : I think we do get it, but not necessarily to the satisfaction of individual farmers.

Senator XENOPHON: I will leave it there.

Senator KETTER: Mr Munchenberg, are you familiar with the Queensland Rural Adjustment Authority's biennial survey of rural debt? Are you familiar with the reasons as to why the 2013 survey was not conducted?

Mr Munchenberg : I am familiar with why the banks chose not to participate this time. We had previously participated, and what we found was that the survey had a number of significant flaws in it. A lot of the definitions used did not match up with the definitions that the banking industry used, which meant it was difficult to reconcile the data that they were after with the data that we actually possessed. There were concerns with how long it took for the data to be processed and to be produced, incompleteness in the data, and it was an extremely expensive exercise for us. At the end of the day, while we are absolutely supportive of their being better data available so that we can have a sensible policy discussion about what is really going on, the QRAA survey was not delivering that and, as I said, it was very expensive for us to be participating in it. So we have not participated in the latest round and instead we are talking to the government about alternative and better and more timely data collection.

Senator KETTER: So you had been contributing to that biennial survey since, I think, around the year 2000. Is that correct?

Mr Münchenberg : I am not sure when we started, but we were certainly contributing to it.

Senator KETTER: But for some reason in 2013 you decided that for the reasons you have just given—

Mr Münchenberg : Well, we had concerns, but those concerns were not addressed. We are still open to having those concerns addressed with a QRAA process. But, what we were seeing was that year after year we were putting a lot of effort and a lot of expense into producing something that was not providing an accurate picture of what was actually happening in terms of farm debt.

Senator KETTER: So since 2013, have you had discussions with the QRAA?

Mr Münchenberg : Well, they are aware of our concerns. Our focus at the moment has been on the federal government, because that is where we have been looking to try to come up with a nationwide approach.

Senator KETTER: But you have not had any discussions with the QRAA?

Mr Münchenberg : They are aware of our concerns, but I am not aware that we have been having ongoing discussions. That is not to say that individual banks have not been discussing it with QRAA.

Senator KETTER: I would have thought that is more of a role for your organisation. If there are problems with the design of the survey, then that would be something that—

Mr Münchenberg : QRAA is aware of our concerns. We have been very happy to make them aware of our concerns: we have raised our concerns, we have discussed our concerns. I am not aware that QRAA has been responsive to those concerns, or that there are any ongoing conversations. I am not trying to cast aspersions on the QRAA process, but those concerns were not a surprise to the proponents of the survey.

Senator KETTER: Thank you.

CHAIR: Thank you, Mr Münchenberg. We talked to the department, and it seems that the concessional loan scheme that has emerged and the money—$239 million—that is there has been lent because your banking constituents will not lend in that space, or they do not fit the criteria; and there is a contention that there is some market failure with the banks here, that they are not able to fill that gap. Do you then accept that there will be the rise of a rural bank, by virtue of these concessional loans, that is going to fill the market gap which the Australian retail banking sector cannot fulfil?

Mr Münchenberg : I am not sure I agree with the analysis of what the loans—

CHAIR: Take me on!

Mr Münchenberg : are about .The loans are there to provide another vehicle to contribute to the restructuring of a farm's financial situation, to increase their prospects on a non-commercial basis.

CHAIR: Which the retail banking sector is not doing.

Mr Münchenberg : For public policy reasons, the government has decided that they are willing to offer subcommercial financial arrangements to assist farmers through difficult times, just as they have always offered some form of drought relief—in one form or another. I do not think it is due to a market failure; I think it is more a case of, 'For public policy reasons, we want to provide additional support to a particular segment of the economy, for a whole host of valid reasons, at particular times.' But I do not think the logical conclusion from that is that there will be a rural bank.

CHAIR: In Canada and the USA they do have forms of these, and they are entities which operate to fill the gap within the market. It seems that the concessional loan scheme—the three tiers of it—has evolved by virtue of the lack of appetite by the retail banking sector to expose itself to any more risk in this area. I do not know how you can put it in any other way.

Mr Münchenberg : I am not familiar with the US and the Canadian experiences except that from what I know of their banking systems, the US and Canadian governments are much more willing to underwrite bank loans.

CHAIR: Yes, but we have to sell our wheat and our meat and our wool into those markets.

Mr Münchenberg : Yes, I understand the competitive reality.

CHAIR: So you guys are off there lending to housing markets, and the Australian taxpayer is having to prop up the farming sector for what you guys will not lend.

Mr Münchenberg : Senator, I am a little confused because I am now being told that we are not lending enough to the agriculture sector.

CHAIR: No, you have just told me that it is much better to lend to bricks and mortar in the suburbs of Sydney—

Mr Münchenberg : It is not better, it is cheaper.

CHAIR: Well, it is a better business model, because you do not require as much capital to be held—

Mr Münchenberg : As an impact.

CHAIR: As an impact. So, if I were a board member on a bank—and I hope that one day I am blessed with that wonderful opportunity, because—

Mr Munchenberg : You know not what you ask for!

CHAIR: Well, in 2009 they asked for a Commonwealth guarantee and got one, for their deposits. It is a pretty lucrative space when you tend to focus on bricks and mortar. So, I am just saying: I do not know that there are any other contenders—that you vacated that space in the bottom 20 per cent or something like that.

Senator XENOPHON: Isn't it the case, Mr Munchenberg, that when the Commonwealth Development Bank was around—for about 40 years, I think, until 1992—that acted as a form of competition to the banks? Having another rural bank—the sorts of things that Senator Edwards has alluded to—would have an impact on bank profits.

Mr Munchenberg : Well, only if we chose to continue to lend into that field. If there is someone out there providing sub-commercial loans that we cannot match on a commercial basis, then we would not be lending into that. We are not going to lend on a non-commercial basis. So, my point is that you have an impact on supply.

Senator XENOPHON: And Basel III might have an even greater impact on rural debt, on rural finance.

Mr Munchenberg : I would not want to overstate that. It is a marginal consideration for the banks.

Senator XENOPHON: But it is not going to make it easier. Basel III will not make it easier.

Mr Munchenberg : No, it does not make it easier. It does not make it easier for any business in Australia.

Senator XENOPHON: But will it make it that little bit more difficult, relative to other businesses, given the nature of rural finance, rural debt and the state of our agricultural sector?

Mr Munchenberg : The single thing that I have seen that is being floated that would have the biggest impact on the riskiness of lending to agricultural business is the reconstruction board. I am serious, because for every loan that we write in Australia to any farmer we will have to factor in the risk that at some point in the life of that loan, whether it is in a year, five years or 15 years, that farmer may get into a situation such that, without the agreement of the bank, the board will come in and force us to write down 25 per cent of that loan. So, we would have to factor that in to every loan we write. There is no other way of doing it. If we could predict in advance which customers are going to go bad, we would be making even more profits.

CHAIR: How are they going to do that? How is the board going to say that you are going to take a 25 per cent haircut?

Mr Munchenberg : I understand from one of the proponents from the other place that that is exactly—he has repeated it a number of times on his website that the proposal would see banks forced to write off 25 per cent of their loans.

CHAIR: I do not think you will see anything like that come from this—

Mr Munchenberg : Well, this is the problem—that the bill as it currently stands is incredibly vague as to what it does, so we can only take the evidence that is available to us.

CHAIR: But you are right to point it out.

Mr Munchenberg : Which is fair enough.

CHAIR: And that is why we have these inquiries. Thank you very much. Our door is always open to the bankers of Australia.