Will Current Economic Conditions Challenge Banks on Rural Lending?

"At SproutAg, we believe that during challenging economic conditions banks are more likely to lend to sound business models"

"Traditionally farming businesses do well during economic downturns"

    Will Current Economic Conditions Challenge Banks on Rural Lending?

    Rising interest rates and declining rural commodity markets are attracting many conversations around the state of the current economy. At SproutAg, we’ve had a number of discussions with clients around a bank’s approach to rural banking in today’s economy.

    This month, we’re sharing our perspective on why we think that Australian banks will support agribusiness clients and continue to increase lending opportunities, despite the challenging economic times.

    1. Australian Domestic Banks overweight in retail lending

    At SproutAg, we believe that during challenging economic conditions banks are more likely to lend to sound business models. In comparison to historic portfolios when Australian banks are overweight in retail lending, they’ll look to adjust their “books”. With the increased cost of living, those who’ll come under pressure will be the fixed salary earners with high household debts in comparison to businesses with sound business models. By focusing on businesses (including farming businesses), banks are in a better position to off-set counter party risk.

    2. Farming businesses do well during economic downturns

    History shows us that during the Global Financial Crisis (2007-2009), commercial property valuations came under pressure and the ASX reduced in overall value along with other asset classes. Despite being in the middle of the millennial drought, rural land in comparison still fared well during this time. There were no large-scale losses, and overall, prices stayed consistent and went ahead. Based on history, farming businesses have an excellent track record during broader economic downturns in comparison to other asset classes, and the GFC is an example of this.

    Recent commodity prices and rising interest rates have impacted the serviceability models of agriculture banks in Australia. At SproutAg, we see this with our finance providers in how they spread out your loan repayments over time, against what their view is of your ‘Year in, Year out’ business plan. However, based on these two factors, we still believe there will be a strong demand to grant ag loans to clients.

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