Reserve Bank governor Alan Bollard has announced that as of next month banks will be required to hold more capital against loans to farmers.

Mr Bollard says the new lending rules are being introduced to protect banks in case the value of farmland held in lieu of capital, decreases.

Bollard told Parliament’s Finance and Expenditure Committee this week that the move would come as no surprise, and it was a result of learning from the financial crisis,when banks lent recklessly, and farmers borrowed in a similar manner.

Federated Farmers economics and commerce spokesperson Philip York says that in the 17 month period between January 2008 and August 2009, New Zealand’s farming debt increased by more than 30 percent, from $35.9 billion to $47.1 billion.

He estimates farmers will be paying off the debt they incurred during this period for the next five years.

But Mr York says the injection of cash to the banks may be starting the whole unwise lending cycle all over again.

“As farmers became more viable with the increase in prices they’ve started paying off capital. So the banks now find they have got this capital in their hot little hand which they weren’t expecting to have at this time.

“So in fact the requirements may actually be where they need to be according to the Reserve Bank without them doing any more and then actually have a little bit more.

“And that is one of my concerns certain banks are offering very low interest rates and very low deposits at the moment for domestic and that’s how we got into this problem in the first place.”

Mr York says now is the time to pay off existing debt – not continue borrowing.

“Westpac are doing it again they’re promoting it – I saw it only the other day again, bemoaning the fact that people are de-leveraged, and that we should all be out their borrowing money to crank up the economy going again.

“Unless I missed something here a bit of prudence is required all round and we should be repairing those balance sheets, before we even think about any more expansion.”

Philip York also says that the high commodity prices mean farmers are now making decent incomes and are less likely to sell their farms.