Imminent changes to the banking system will soon see farmers having to lay down a lot more capital in order to get a loan.

As of June 30, the Reserve Bank will order the four major banks to hold capital worth up to 90 percent of a loan, compared to 50 percent at the moment.

Not only does this mean farmers will be able to borrow less – but it’s going to cost them more to do so, with the banks predicted to pass on their higher costs to customers.

The higher capital requirements will apply to farm loans, not farm servicing or support industry loans.

Reserve Bank governor Alan Bollard has previously said that the changes are necessary to prevent a repeat of 2008 – when the banks lent massively to New Zealand farmers, particularly dairy farmers, despite the wheels falling off the world economy, due to the global financial crisis.

Prior to 2008 banks had to hold 100% capital.

However, Federated Farmers economics spokesman Philip York says the changes have been well signalled and that the banks are already self-policing.

“I still perceive that the banks have taken this all into account and the Reserve Bank has said so, they have made the adjustments already you know.  So in effect a lot of the people out there have already been adjusted. 

Philip York says that the days of reckless lending and borrowing in the rural sector are long gone, but that farmers have to be careful the banks don’t use the situation to their advantage. 

“Well we’ve just got to keep an eye on the fact that the banks don’t actually use this situation to crank up interest rates up and above what they should actually be at the time.

“I think it’s still a competitive market out there to a degree, and as such, every case has to stand on its own merit and people shouldn’t borrow money unless they can afford to pay it back.” 

ASB Bank rural economist James Shortall says the move is to protect banks from any sudden falls in the value of land.