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National Australia Bank (NAB) has announced this week that it will immediately put a stop to penalties incurred by farmers for defaulting on payments during the current period of drought.

Loans in rural areas are some of the riskiest for banks, and NAB has come under scrutiny for increasing pressure on farmers dealing with one of the worst droughts in recent times. The Royal Commission paid close attention to what the NAB was planning to implement.

With upcoming financial regulations expected to tighten in the wake of potential over-lending to those only able to service interest on the debt and other issues, every move by the major banks is under a microscope. Leaning in on such a politically sensitive area and removing a foundation stone for farmers considered vital to their local areas’ economy and livelihood would not be a wise decision.

NAB has therefore decided to offer discount loans to farmers struggling with debt. The Chief Executive of the bank, Andrew Thorburn, said in a speech that the NAB had “lost touch”, according to some findings that emerged from both the Royal Commission and other independent inquiries.

Already the largest lender to rural areas, NAB will now no longer be demanding interest if farmers miss repayments due to the lack of rainwater in the East of Australia and beyond. Wheat production fell to an eight-year low in 2018 as the drought began to take hold.

Farmers owning livestock are also struggling, as they must deal with culling thousands of cattle and sheep that they are currently unable to feed. This could well have a knock-on effect on food supplies in the surrounding areas, so more helpful economic measures will likely encourage solutions rather than engender further malaise.

Graincorp, Australia’s biggest handler of grains, had to release a profit warning back in May, while Nufarm, which produces fertilizers and pesticides, slashed its earnings guidance earlier this week.

NAB and other banks are facing sharper criticism and accusations of being out of touch, as reflected in Thorburn’s statement. As the Royal Commission looks to extend its reach to protect consumers and businesses from banking measures that could damage their bottom line, banks are facing a steady erosion of trust that they will have to find a way back from.

The Royal Commission has already released the findings from one inquiry, revealing that a farming couple from Queensland faced more than $2.6m in interest from NAB after they found themselves in arrears following periods of both drought and excessive rainfall. The cattle farmers then struggled to meet their $3.1m loan and immediately had to deal with large interest payments due to their initial pitfalls. 

Moves such as this are unlikely to endear banks to the public, and wide-scale reforms are likely.

Federal Government Minister for Agriculture David Littleproud welcomed NAB’s announcement: “This is fantastic news for Aussie farmers. One in three farmers bank with NAB, so this change has the potential to help a lot of families.” 

He went on to say that it is now time for other banks to follow suit and see this as an “investment in agriculture’s future.”