Oireachtas Joint and Select Committees

Tuesday, 9 May 2017

Joint Oireachtas Committee on Agriculture, Food and the Marine

Agriculture Cashflow Support Loan Scheme: Discussion

4:00 pm

Photo of Pat DeeringPat Deering (Carlow-Kilkenny, Fine Gael)
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I thank our next group of witnesses for appearing before the committee to update members on the agriculture cashflow support loan scheme, which was introduced in January of this year. I remind members, witnesses and people in the Gallery to ensure their mobile phones are turned off completely as they can affect the broadcasting system. I welcome Mr. Mark Cunningham, who is the director of business banking at Bank of Ireland; and Mr. John Fitzgerald, who is the bank's head of agriculture. I also welcome Dr. Anne Finnegan, who is the head of the agriculture sector in AIB; Mr. Ken Burke, who is the bank's head of group credit products; and Ms Catherine Moroney, who is the bank's head of business banking. I also welcome Dr. Ailish Byrne, who is Ulster Bank's senior agricultural manager; and Mr. Eddie Cullen, who is a managing director in the bank's commercial banking division.

I would like to bring it to the attention of witnesses that they are protected by absolute privilege in respect of the evidence they are about to give the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given. They are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or entity by name or in such a way as to make him or her identifiable. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable.

I invite Mr. Cunningham to make his opening statement on behalf of Bank of Ireland.

Mr. Mark Cunningham:

I thank the committee for this opportunity to address it. I am joined by my colleague, Mr. John Fitzgerald, who is the head of our agricultural division. He will address some key issues for the committee. Our remarks are set out in a short presentation that has been furnished to the joint committee. Bank of Ireland is the largest lender to the Irish economy, with new lending of €6.7 billion last year. Our share of the new SME and agriculture lending market is over 50%. We have the largest retail network in the country. The overall agriculture or primary industries loan book has de-leveraged by approximately 9% since 2014. During this period, Bank of Ireland has managed to increase its loan book by 8%. We have done that by having over 50% of the flows in the market. We see the Strategic Banking Corporation of Ireland cashflow scheme as an opportunity to further expand our participation in that segment of the market. I will now ask Mr. Fitzgerald to make a few comments on the scheme.

Mr. John Fitzgerald:

As Bank of Ireland's head of agriculture, I will give the committee a brief overview of lending in the agriculture sector so far this year and year on year. I will also provide some commentary regarding our status with the Strategic Banking Corporation of Ireland scheme. As Mr. Cunningham has outlined, Bank of Ireland has consistently provided in excess of 50% of all new lending to the agriculture sector in recent years. New lending to agriculture so far this year is in line with the same period in 2016. In line with the recovery in commodity pricing in certain sectors, we are seeing an increased volume of applications for funding, particularly from dairy farmers. Average farm overdraft utilisation in 2016 was 21%. I believe this is an excellent measure of the financial robustness of the sector as a whole. Allowing for seasonal variation, there has been no material change in agriculture cashflow performance so far this year.

I wish to bring the attention of the committee to the third slide in the bank's presentation, which provides up-to-date information. As of close of business on Friday, 5 May, Bank of Ireland had agreed to provide €65 million under the Strategic Banking Corporation of Ireland agriculture cashflow support loan scheme. Demand for loans has exceeded all of our expectations. Within four weeks of the start of the scheme, the bank had received 1,900 applications for inclusion in it. To date, the bank has issued loans worth €39.1 million, which represents 60% of our total commitment to the scheme. We are committed to having €65 million fully drawn as quickly as possible. We expect that the vast majority of the funds will be drawn by the end of June. As members of the committee can see in our documentation, the beef and dairy sectors account for 85% of all funds drawn to date and 87% of all applications drawn to date. We had expected to see a greater appetite for funding from the tillage and pig sectors, but this has not transpired.

Bank of Ireland's average loan size under this scheme is €29,000 and its average loan term is 31 months. Approximately 38% of all funding drawn to date is for a loan tenure of four or more years. Beef farmers, who typically require funding to purchase stock, have received 57% of all Bank of Ireland funding drawn to date. This funding is normally loaned over a term of up to 24 months. Some 24% of funding has been provided for terms of between two and three years and 38% of funding has been provided over a 12-month term. Loans worth €12.7 million have been approved but have not yet been drawn. A further €13.2 million is to be processed to approval stage in fulfilment of Bank of Ireland's commitment under the scheme. As a result of the receipt of such a volume of applications within such a short period of time, there have been delays in processing those applications. We expect to have all applications processed within the next two weeks. Bank of Ireland's priority is to get the loans drawn as soon as possible. We estimate that more than 2,100 loans will be drawn by our customers under the scheme. I thank the members of the committee for their time.

Mr. Mark Cunningham:

The only additional comment I wish to make in the context of our discussion on the Strategic Banking Corporation of Ireland scheme is that Bank of Ireland recognises the issues and challenges faced by the agriculture sector in the Brexit negotiations and discussions. We welcome the Department of Agriculture, Food and the Marine's efforts to source alternative markets for beef, in which we are participating. We recognise that if there are any changes to the CAP scheme, we will have to figure out and factor in the implications they will have for farmers in general. Members might wish to return to this aspect of the matter during the course of our discussions

Photo of Pat DeeringPat Deering (Carlow-Kilkenny, Fine Gael)
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I now invite Dr. Anne Finnegan to address the joint committee on behalf of AIB.

Dr. Anne Finnegan:

My colleagues and I are pleased to have this opportunity to give the Oireachtas and the Irish public an update on AIB's ongoing support for the agriculture sector, in particular our participation in the Strategic Banking Corporation of Ireland agriculture cashflow support loan scheme. I am AIB's head of agriculture. I am joined by Mr. Ken Burke, who is AIB's head of group credit products, and Ms Catherine Moroney, who is AIB's head of business banking.

I refer the members of the joint committee to the slides that were circulated in advance of this meeting. As they are aware, 2016 was a challenging year on a number of fronts for Irish agriculture. Most sectors experienced a price-related downturn, while others fared better. The UK's decision to leave the EU and the rise of protectionism across key global markets has now signalled a new era for trade that will undoubtedly have an impact on agricultural commodities. AIB is acutely aware of the ongoing challenges facing the agrifood sector. We are particularly aware of the potentially significant impact of Brexit on the sector and the anxiety that is causing for processors, food manufacturers and farmers. It is generally accepted that its greatest impact will be on the meat sectors, most especially the beef sector, cheddar manufacturers and consumer food businesses, including SME food businesses. While our treasury teams continue to support the sector at all levels in the bank - corporate, business centre, branch and direct - we are working with customers to understand the implications for their businesses and to learn how best we can support them. To that end, we have just appointed 21 Brexit advisers, who will support our customers and our frontline staff in navigating the challenges and opportunities posed by Brexit.

As price takers, farmers have no influence on external events that may have an impact on the prices they receive. Their only option is to look inside the farm gate and to seek to make their enterprises as efficient and resilient as possible. Grass utilisation is of key importance in this regard in the livestock sector. AIB has committed a substantial investment over four years in the Teagasc-led Grass10 initiative, which seeks to increase grass utilisation and cost efficiency on livestock farms.

AIB is committed to playing its part in the concerted national effort to minimise the negative impact of the UK's decision.

AIB has a long and enduring association with the Irish agrifood sector. The bank is now the main lender to Irish farmers and AIB accounts for more than 40% of total Irish farm lending. We are all aware of how critical agriculture is to the economy, jobs, individuals, families, communities and broader Irish society. It is a core part of our SME strategy, which was cemented in the 1970s with the establishment of an agri-advisory team. Today, this experienced 16-strong agri-sector team, all of whom are agricultural science graduates, is regionally based. The main role of the team is to provide objective farm financial and technical analysis to the bank in individual farming cases, in addition to supporting bank staff.

In general, aggregate farm debt in Ireland continues to decline from a peak in 2009. However, we have seen strong demand for new lending in recent years as farmers invest in their enterprises. The dairy sector continues to be a key driver of on-farm investment and, in recent years, the beef sector has also invested significantly. Our analysis of market predictions from the main forecasting agencies indicates that the medium-term outlook for global agricultural commodities remains positive. On this basis, AIB maintains a good long-term outlook for agriculture, while recognising that challenges in each of the production areas exist. In fact, agriculture has experienced comparatively lower levels of credit difficulties than other SME sectors. AIB is very happy to support ongoing investment in this industry.

Despite the challenging price environment experienced by most farmers in 2016, AIB's new lending to farmers increased marginally on 2015 levels. There was no significant increased demand for working capital in 2016. Overdraft utilisation levels at the end of March 2017 were on par with the same period in 2016 and 2015. Notwithstanding the buoyant cash flow position of the sector last year, AIB undertook the following supports specifically in regard to cash flow: proactive contact with dairy and pig farmers; proactive contact with the main dairy processors in regard to farmer support; agri-adviser presentations on cash flow planning at over 30 industry seminars; and the publication of customer information on farm cash management.

According to the AIB agri-financial services research of July 2016, undertaken by Ipsos MRBI, almost 40% of farmers have no bank borrowings. In addition, research suggests that four out of ten farmers plan to invest in the next three years. This is higher among dairy and commercial farmers. To support those farmers that do have a requirement for bank funding, AIB has a range of products, bespoke and general SME, to support farmers needs. In November 2015, we launched our second €500 million fund to support on-farm capital investment and working capital.

Farmers use a variety of mechanisms to manage working capital, including bank funding and merchant credit. Depending on the nature of the enterprise and the working capital cycle, AIB has a number of options available, including a business overdraft, seasonal stocking loans, prompt pay and the farmer credit line. A farmer may avail of one or all of these in combination to support his or her working capital.

AIB's farmer credit line is a unique product which seeks to provide a flexible approach to managing farm working capital. For planned seasonal expenses, farmers can draw down funds from a credit line to their current accounts and have flexibility to repay within the year as they have funds available. This product is competitively priced and farmers may currently avail of a typical rate of 3.825% variable. AIB has a range of options to support capital investment on farms. Farmers can avail of our on-farm capital investment loan, which is priced at 5.5% variable, a 1% discount on our standard variable business loan,

Aside from the cash flow support scheme, AIB is the leading lender of SBCI SME funding, the sector having availed of €400 million to date. This was made available at a rate of 4.5% variable, a 2% discount to our standard business variable rate, and can be used to finance most on-farm capital investment. Farmers have been keen to avail of these SBCI funds, accounting for 27% of the total AIB draw downs in 2016 and quarter 1 of 2017. In addition, we also offer asset finance to support investment in machinery and equipment. As with all SME investment the term of the loan is typically linked to the useable life of the asset.

Following the announcement by the Minister for Agriculture, Food and the Marine, Deputy Creed, of the plan to introduce a €150 million agri-cashflow support loan scheme, AIB engaged with the SBCI to participate on the basis of a €60 million loan fund. Given the tight timelines from announcement to expected launch of the fund, we applied significant resources to our participation in the scheme and to developing a product which would enable our customers are avail of this funding is efficiently as possible.

The scheme features and eligibility criteria were set out by the SBCI. The key features of the scheme were a maximum loan amount of €150,000 per farm enterprise, loan terms of a minimum of one year of to a maximum six years, loans that are unsecured, optional interest only repayments provided at the start of loans and an interest rate of 2.95% fixed for the term of the loan.

The SBCI also set out key criteria relating to how loans should be used and who can apply, as well as eligibility criteria. As with all similar schemes in which AIB participated, normal lending terms and conditions applied.

Having had previous experience of administering SME funding from national and European funding agencies, we anticipated some complex elements in this scheme. As such, we supported the launch internally and externally with significant resources to help our staff, customers and their advisers to fully understand the details of the scheme. Following the launch of the scheme, we hosted 30 external briefing sessions across our 19 local markets for stakeholders including accountants, Teagasc advisors, agricultural consultants and farming organisations.

Given that this scheme was first announced in early October 2016, we envisaged significant pent-up demand. AIB’s fund opened on 31 January and closed on 2 March following a strong pipeline of applications. We are currently processing all outstanding applications as full information is received from customers. When all applications are completed, the fund will have been oversubscribed. AIB has taken the decision to accept all applications received by the closing date at the same rate of 2.95% fixed and subject to the same terms and conditions as the SBCI cash flow support loan scheme.

As of last Thursday, 4 May, 62% of our applications have been processed and sanctioned, and the funds are now available or have already been drawn down by customers. The dairy and beef sectors account for the majority of the applications and funds sanctioned. However, all sectors benefited from the scheme. Of those loans that are fully processed, 72% of funds have a term of greater than four years and 23% have a term of 13 months to four years, while 5% have a term of one year.

AIB has been pleased to have the SBCI cashflow support loan as a component of our suite of financial supports for farmers in 2017. We reiterate that farming remains a core business sector for AIB. It has always maintained a through-the-cycle view of the agri sector, recognising that there will be a mix of good and bad years. As a leading bank to the industry, we will continue to play a key supporting role in the development of an efficient and sustainable agriculture industry in Ireland.

On behalf of the bank, I want to again express thanks to the committee for inviting us here today. We very much appreciate the opportunity to discuss this key SME sector and welcome members' questions.

Dr. Ailish Byrne:

I thank the Chairman and members of the committee for inviting us here today. We welcome the opportunity to talk to the committee about Ulster Bank's participation in the SBCI agricultural cashflow support loan scheme and our support for the agrifood sector. I am Ulster Bank’s senior agricultural manager. I am joined by my colleague, Eddie Cullen, managing director of our commercial banking division.

Ulster Bank is the third largest bank in the Republic of Ireland. It is unique as the only systemic bank that operates in the Republic of Ireland owned by a parent with international reach. Our strategic ambition is to be the number one bank for customer service. We are focused on making Ulster Bank a customer-centred bank that is simpler, more agile and offers an appealing alternative to the dominant players in the market. We recognise the importance of agriculture to the economic and social fabric of the country. It is a core part of our business.

The improved economic and market sentiment and higher demand for credit has continued into 2017. We firmly believe that for the Irish economy to continue to recover, it is essential that there is competition in the banking market. We are determined to provide that competition across all the sectors in which we operate.

The agriculture sector is a key component of our business and accounted for 22% of our total SME business lending in quarter one of 2017. This activity was primarily driven by our existing customer base renewing their annual working capital facilities and the extension of new term debt to farmers seeking to expand and-or modernise their farm businesses. This activity was most evident in the dairy and poultry sectors. Our banking relationships in the agrifood sector start with the many farmers who bank with us, and include agribusinesses from artisan food producers up to the largest multinational food manufacturing businesses. Our relationship with many of these customers stretches back for decades.

At Ulster Bank, we have skilled managers who understand farming. Our agri-training programme is accredited by Chartered Banker and 66 of our colleagues in our credit and front-line teams have completed this course. Due to the calibre and success of this Ulster Bank developed programme, it was adopted by the Institute of Bankers as a module in 2016 and is now offered to employees of all financial institutions, as part of its professional diploma in SME credit.

At Ulster Bank we understand the agrifood sector and are committed to supporting both individuals and enterprises, from farmyards to boardrooms, in a focused, structured and strategic manner. We also recognise that lending must be responsible and based fully on a farmer's ability to generate cash flow to repay debt. We take a long-term view of agricultural lending, recognising the inherent volatility in farming.

Through our close interactions with all stakeholders in the dairy industry, we realised in 2014 that dairy farmers might face some cash flow challenges in 2015 and 2016 owing to a low milk price. This coincided with a time in which many dairy farmers were expanding, post-milk quota abolition. In response we developed the Ulster Bank Dairy Farmer Toolkit as part of our proactive support for our dairy farm customers. The toolkit provides solutions for farmers with options such as increased working capital facilities, an interest-only option, or a combination of both, depending on individual circumstances. The dairy sector which has attracted most commentary is not the only farming sector in Ireland to experience cash flow difficulties. The pig and tillage sectors have struggled with low prices for a number of years, while both the beef and mushroom sectors have been impacted on in recent times by the uncertainty caused following the referendum on the United Kingdom's membership of the European Union. Ulster Bank offers support and solutions to all of its customers during periods of pressure, once the underlying core business is sustainable into the future.

The increased volatility evident in the agriculture sector in the past few years due to weather, price or unexpected individual on-farm challenges is a reality that the sector must learn to manage. Farmers must continue to improve on-farm efficiencies and competitiveness to survive the income cycles which are becoming the norm. At Ulster Bank we believe the production and utilisation of grass on livestock farms drives efficiency. We introduced a pasture loan in 2015, which provides finance for grazing infrastructure, drainage, re-seeding and soil fertility measures. We continually encourage all farmers to analyse their costs of production, compare them to those of their peers and adopt best technologies. The preparation and utilisation of a cash flow budget are also key tools required to manage a farm business effectively. Ulster Bank believes all farmers need to continue to develop a broad range of skills. Greater understanding of technical efficiency, people management and business skills are required to successfully develop farming operations in this increasingly uncertain environment.

As part of our meaningful help and support measures for farm families we ran regional seminars in Limerick and Donegal entitled, Building Capabilities on Farms. The seminars brought industry experts and sectoral intermediaries together to enable the attending farmers to discuss and seek advice on solutions and strategies to help to address volatility in their businesses. We had representatives from Pieta House and Mental Health Ireland at both events to recognise and support the need for mental well-being, as well as financial well-being, on farms. They stressed the importance of talking, listening and seeking regular downtime from the stresses and strains of running a farm business.

At Ulster Bank we continually provide additional help and solutions for our customers through the publication of articles, participation in various fora and conferences, as well as sponsoring some key agricultural events. In July Ulster Bank will partner with Teagasc Moorepark to support its biannual open day. The theme of the event, Resilient Technologies, will provide dairy farmers with the opportunity to view and discuss the latest developments in key dairy technologies to help them to manage present day challenges. These factors are firmly embedded in the Ulster Bank business and credit strategy for the farm sector.

Through the SBCI agricultural cash flow support loan scheme, Ulster Bank was allocated €25 million. Approximately €6 million of this fund has been drawn-down, with an average loan size of more than €50,000. Based on our drawdown figures to date, we anticipate that 500 of our customers will benefit from the scheme. An initial analysis of the loans also indicates that they mirror Ulster Bank's geography and farm sector concentration profile. The majority of funds were allocated to assist with working capital in 2017. There was strong demand to assist with the purchase of trading stock, fertiliser and feed. The funds will be used as an alternative by farmers to merchant credit. Our customers also sought funds to replenish working capital previously used to support capital expenditure on farms. There were also funds requested to clear super levy, revenue and merchant credit bills. The vast majority of applications received through the scheme were approved. However, a small number of applications were declined owing to the farm business being in financial difficulty or because the purpose of the loan did not meet the scheme eligibility criteria.

Where the purpose of the loan did not fit the eligibility requirements but repayment capacity was evident, we provided support through our other business products. There were also requests to refinance existing term debt and for new investment which were not permitted under the scheme.

With regard to the term of the loans provided by Ulster Bank, we aimed to match the tenure with the purpose of the loan, within the confines of the scheme. For example, a farmer who had bought weanlings in the spring of 2017 with the purpose of selling them as stores received a loan for 12 months, while a farmer who had financed the partial construction of a milking parlour from working capital in 2014 was subsequently able to finance it over a six-year period, the maximum term allowed under the SBCI scheme.

I reiterate that Ulster Bank is committed to the agrifood and farming sectors. Our aim is to partner with farming businesses to enable them to grow and to continue to play our part in supporting the agriculture sector through the difficulties that arise. We have developed flexible solutions for our customers, including the Dairy Farmer Toolkit, pasture loans, as well as participating in this scheme. Ulster Bank looks forward to further engagement and collaboration with all stakeholders in the industry to consider a range of options to address the fundamental difficulties facing the sector.

I thank the Chairman and members for affording Ulster Bank the opportunity to address the committee. Mr. Cullen and I will be happy to address questions members may have for us.

Photo of Jackie CahillJackie Cahill (Tipperary, Fianna Fail)
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I thank the representatives of the three banks for their presentations. The representatives of Bank of Ireland have said 1,900 applicants were successful, whereas the representatives of AIB did not give a figure, but Ms Finnegan said the bank had catered for everyone up to 2 March, four weeks after the opening of the scheme. Dr. Byrne has said Ulster Bank closed the scheme after two weeks. The window of opportunity for farmers to avail of the loans was extremely narrow. How much more demand do the banks believe there was for the scheme? I was approached by a number of farmers. At that time of the year they are busy and do not frequent their banks on a regular basis. When they inquired about the scheme, it had closed. If more funding had been available, would there have been a greater take-up?

The scheme was introduced because of the poor product prices in 2016. I cannot understand the poor take-up of the scheme by farmers in the tillage and pig sectors. Is it because they applied and were refused on the basis of their repayment capacity or did they just not apply? Are they considered to generate such poor returns for the banking sector that they knew an application would not bear fruit? Last week we received a presentation from the SBCI which also referred to these sectors. In particular, the officials referred to the horticulture sector and the financial difficulty growers got into following the Brexit referendum. It is hard to understand how there has not been a great drawdown by producers in these sectors under the scheme.

Perhaps I am wrong, but I thought the scheme was introduced to address existing merchant debt and farmers who had financial problems as a result of the 2016 crisis when product prices fell. I did not think it was a scheme to provide stocking loans in 2017. Ulster Bank outlined clearly that it was used for such loans this year. My interpretation of the presentations made to the committee by the Minister and the Department is that such loans were not envisaged under the scheme. I have concerns that it was used by the banks for business that they would have been doing in the normal course with farmers this year.

It was certainly not my understanding and it is the one point in the presentations today with which I have serious difficulty. I would like a discussion about it. Merchant credit bills, super levy bills and even tax bills with Revenue were built up due to cashflow problems in various sectors in 2016. That was my understanding of why this was introduced whereas this is definitely not something for which I envisaged the scheme would be used. I would like to hear the views of the three banks as to why it was used for the purpose of stocking loads for 2017. That is not my understanding of the purpose of the scheme. The three banks have in common the fact that the scheme closed very quickly within them. Can they give us a handle on how much more demand is out there?

The duration of the loans is the other issue with the way the interest subsidy will work. I have definitely had a number of farmers on to me who were unhappy at the duration of the loans they received. They felt there was significant pressure placed on them by financial institutions to reduce the loan terms. From a cash-flow point of view for farmers, the longer the loan goes on at this interest rate, the more beneficial it is for their businesses. I might have missed the data but AIB definitely indicated that 72% of the loans were over four years. Bank of Ireland said the average loan term was 31 months. There was definitely an emphasis on reducing the terms of the loans. What are the banks' views on that?

Photo of Pat DeeringPat Deering (Carlow-Kilkenny, Fine Gael)
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We will take Deputy Martin Kenny's questions before going back to the banks.

Photo of Martin KennyMartin Kenny (Sligo-Leitrim, Sinn Fein)
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The witnesses are all very welcome. I thank them for attending and making their presentations. A couple of issues arise immediately for me. The advantage of the scheme was that the money was available without security being required. It was sold on that basis. However, everyone I speak to in the farming community went to the banks with which they deal generally and with which they all have security down. Their deeds are already there. The advantage of that is difficult to understand. Having said that, access to capital has been one of the major issues not only for farmers but for the whole population for the last number of years. It is good to get it and to be able to use it appropriately. I share Deputy Cahill's analysis that much of this money was used for issues with which the banks were already dealing. That is one of the problems we have with it.

The other issue I have relates to the value of it. The wholesale interest rate from the European Central Bank is very low, which is one of the issues raised with us all the time. Across Europe, the European Central Bank is providing money to every banking institution. The Irish banks are charging almost double what every other bank in Europe is charging, not just to farmers but to every sector. I ask the witnesses to explain to me who is creaming it off. It is certainly not farmers and businesspeople. It is a real issue for people with mortgages and across the board. It is not fair that Irish people are paying far above the odds. My view is that the banks got into trouble and ran into a whole series of debts which they are screwing the Irish public to pay off. I would like the witnesses to find some way to assure me that is not the case.

Mr. Mark Cunningham:

I thank the Deputies for their questions. Deputy Cahill asked about the level of demand. Last year, we provided nearly €400 million in lending to farmers in the primary producer sector. We had an allocation under the scheme of €65 million. As such, it is the level of demand as a proportion of the overall level of agriculture lending we plan to do in 2017. As my colleague, Mr. John Fitzgerald, has indicated, we expect demand to be broadly similar to 2016. One can assume that there will be a commensurate level and a commensurate increase in demand for farmers who qualify under the scheme.

As we indicated earlier, 57% of the scheme funds so far have been used by farmers as stocking lending. That is permitted under the scheme. It is one of the conditions that is allowed. We did not indicate or devise the scheme in that regard. As a result, if people qualify under the scheme, we are in a position to grant them facilities. There is no doubt that there are large levels of merchant debt among farmers. We have constantly indicated that they can refinance that more cheaply with the bank. Average merchant debt trades at probably 1.5% per month and we encourage farmers constantly to look at refinancing it with the bank with normal banking facilities. For a variety of reasons, they chose not to do so. Consequently, a number of farmers have not chosen to refinance merchant debt under the SBCI scheme.

Approval rates in respect of the pig and tillage sectors are no different than other approval rates under the scheme. We did not have any reason to believe there would be lower levels of demand from the pig and tillage sectors than from the sectors from which applications came. Certainly, there was no bias on our part or among proponents of the scheme nationally such that pig or tillage farmers were not in a position to apply.

I was asked about access to capital by Deputy Kenny. All the banks will indicate to him that there is no shortage of capital available for the agriculture, SME, or, indeed, any other sector in Ireland. All the banks are willing to support farmers and provide them with facilities as they look to expand and grow their enterprises. Deputy Kenny also referred to the level of interest rates. Unfortunately, there is a great deal of misinformation out there about the level of interest rates and the comparable rates across Europe. We have done detailed studies and analysis of the whole market. One of the findings when one considers the SME and agriculture sectors across Europe is that the Irish market has three main characteristics which differentiate it. First, over 85% of lending in European markets is for one year or less whereas over 48% of lending in the Irish market is for more than three years. Second, on average in Europe there are upfront fees for lending of between €40 and €100 with a subsequent 0.4% to 1.6% rate for facilities. When one adds the fees in respect of one-year facilities to the interest rates, one gets a very different picture. Third, there are mutual guarantee and co-operative schemes in the agriculture sector across Europe, which are not available in Ireland. That was one of the problems this scheme attempted to address. Over 15% of lending in Europe comes with the benefit of the guarantees from those mutual guarantee schemes, which we do not have. All that tends to alter significantly the level of interest which is ultimately charged to farmers.

When the SBCI, the EIB and KfW were working with us to devise this scheme, they analysed the pricing mechanisms and the manner in which banks and financial institutions priced their products to the market in considerable detail to determine the pricing for the scheme. As I am sure Mr. Nick Ashmore indicated to the committee, the effective pricing for the scheme was designed to ensure there was no net benefit to the banks and financial institutions. In effect, the subsidies and additional premium paid to the banks brought the pricing levels up to the levels at which the banks were able to put credit out into the marketplace. A straight comparison between one interest rate and another is far too simplistic. Any suggestion that we are ripping off the people of Ireland and that our European counterparts are being more munificent is not correct.

Dr. Anne Finnegan:

I thank the members for their questions. I note to Deputy Cahill that the total number of applications to AIB was 2,188. It is not surprising that the take-up figures in the tillage and pig sectors are low in comparison to other sectors given the number of operators in those sectors.

We work on the basis of approximately 200 commercial pig farmers and 1,000 commercial tillage farmers out of 6,000 overall. It is reasonable that the beef and dairy sectors account for the majority of the debt outstanding, as they are the predominant sectors.

Within AIB the demand from the tillage sector was particularly localised. From the latest figures last week, the tillage sector accounts for 6% of the funds drawn down or funds ready to be made available to be drawn down. That is what we would have expected. For the pig sector, the figure is similar to what the Strategic Banking Corporation of Ireland, SBCI, reported, namely, 1%. In respect of both but particularly the tillage sector, our experience is that demand was localised. For example, the majority of demands at the Enniscorthy branch are from the tillage sector. Demand in the pig sector would not be as concentrated, but it would be localised to some degree.

We have a strong market share in the pig sector, banking with some of the best and most efficient pig operators. It has been our experience in the pig sector that it goes through cycles over many years. The capacity of the most efficient pig sector producers to ride through these cycles is remarkable. To some degree, it is not surprising that they were able to come through last year because they had a lot of form in doing so. They are quite adept at managing through the lean years.

Mr. Cunningham has addressed the issue of utilising the funds for cash flow in 2017. That was part of the make-up of the scheme and eligible for finance under it. Farmers applied for it and where they were successful, we were happy to finance them.

Mr. Ken Burke:

On the question of pressure being exerted to reduce the terms of a facility, we have spoken about AIB's experience of the draw on funds and indicated that 72% of the facilities were drawn for periods in excess of four years. We were clear and explicit to our own people internally on the features of the scheme. We were conscious that we wanted to reduce complexity for farming customers. We did not change our application form and did not introduce additional complexity. Rather, we equipped our relationship managers with the information required to obtain the information the SBCI needed for the scheme. That was important. Any assertion that there may have been a focusing on shorter terms cannot be borne out by the numbers about which we have spoken.

As for the demand for the scheme, I agree that it was filled in a short window. As we mentioned in our opening remarks, we catered for some customers beyond the terms of the €60 million fund to which AIB had subscribed. We did not want customers to be disadvantaged because the shutters had come down on the scheme after a short time. We have honoured these commitments.

On average interest rates, we are acutely conscious of the needs of the agriculture sector. Beyond the €60 million scheme, we are a long way through our second tranche of funding of €200 million from the SBCI. We have had broad SME funding of €400 million. Agriculture has been the largest sector to avail of that funding. It has been offered at a rate of 2% below our standard variable loan rate. It has been active for several years at a rate of 4.5%. On the demand for schemes such as this, in particular, working capital, in its product suite AIB has a farmer credit line which we believe offers a market leading rate of 3.825%. For customers looking for low-cost working capital funding, that is a product that is freely advertised and available to customers. It works alongside their overdraft facilities and can be accessed online. Within our product suite we have low-cost funding available to farmers.

We saw strong demand for the scheme. Was some of that demand accelerated by the window of opportunity? Possibly, it was. When we look at the growth of our agricultural lending in the first quarter, we suggest some people were making applications for credit they might not use until later in the year.

For north of 60% of scheme funding applications have been booked. There were some customers, however, who were prudently planning to meet working capital requirements throughout the year, given that the terms of the scheme allowed for funds to be drawn by the end of December.

On Deputy Martin Kenny’s other main point about interest rates, AIB has passed on four standard variable rate reductions to mortgage customers. It has the lowest standard variable rate available in the Republic of Ireland.

Photo of Pat DeeringPat Deering (Carlow-Kilkenny, Fine Gael)
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The committee has heard about the difficulties with the length of loans. There is some disquiet about pressure being put on farmers to take out a loan for a shorter period. What criteria does the bank use in general to determine whether a loan should be taken out for one year, two years or six years? The main purpose of this loan scheme was to help cash flow. In the event that somebody has to take out a loan for a shorter rather than a longer period, there will be no benefit from a cash flow point of view. What criteria are used to determine the length of loans?

Dr. Anne Finnegan:

From AIB's perspective, the term of the facility, whether it be working capital or capital investment, is typically tailored to meet the nature of the investment. It was no different under this scheme. As my colleague, Mr. Burke, pointed out, the spread of terms suggests there was no pressure within AIB to reduce the term of loans. Only 5% of the funds we have made available to date are for one year.

In trying to alleviate cash flow pressures such as merchant debt or demands from outstanding creditors we review them on a case by case basis and looki at the debt built up relative to the business and why it has built up. We then look at the term the business could sustain without putting undue pressure on it in the medium to long term. While it is a feature of the scheme, it is something we do periodically to relieve working capital pressure in sectors during downturns. One is looking at a period of two to four years, depending on the nature of the build-up of credit and what the business can sustain. Under the SBCI, if one was looking at trading stock which would be sold within 12 months, the appropriate term would have been no more than one year, again without building pressure into the following year. In the case of capital expenditure, we would be looking at longer terms such as four years.

Mr. John Fitzgerald:

Ultimately, it is about matching the lifespan of the asset with the terms of loans. Typically, credit builds up. For example, in the case of feed and fertiliser bills in 2015 and 2016, it would not have made sense to turn them out over six years. In many cases, we engaged with our customers on the application where they had funded capital expenditure from cash flow for several years and, ultimately, that was the source of the pressure. Rather than take a credit bill from 2015 and pay it over a longer period, we looked to split it and apportion the expenditure based on what it had been used for. If it had been used to fund the extension of a shed in 2015, potentially it was a six-year loan, whereas if feed and fertiliser made up half of what had been applied for, it could be included in a two-year loan. It was a case of trying to understand what had been included in the application and matching it with the appropriate term. In most cases, we had that kind of proactive conversation with our clients.

Dr. Ailish Byrne:

To respond to Deputy Jackie Cahill’s question on the demand for the product, there was much media attention, as well as from the SBCI and the banks, in that it was a limited fund of €150 million at an attractive rate of interest and on a first-come, first-served basis. This drove the high initial demand for the scheme. Today we have a limited waiting list of people who wish to avail of this product, if more funding becomes available for the scheme.

It is not a very large waiting list. The policy of a first come, first served basis drove people to apply for the loan within a very tight timeframe.

Let us consider the low take-up by the tillage and pig sector. The people who work in the pig sector sought larger loans and the full amount of €150,000 from the Ulster Bank. The loan has been used to clear their merchant credit bills that had built up over the past number of years, a situation that was driven predominantly by a low price for pigs. Ulster Bank has taken out some of their merchant credit bills, up to the maximum of €150,000, for the full six years of the loan. We did so due to the uniqueness of the pig sector and the current market.

Ms Finnegan commented on the tillage sector. The sector has become localised around the main grain growing areas here. It has been affected by adverse weather and low prices for a number of years. Prices will remain an issue for the sector this year. The people who work in the sector have sought loans to pay off their merchant credit bills and provide working capital to buy fertilise seed and sprays for the 2017 growing season.

Stocking loans have been predominantly addressed. A stocking loan was deemed suitable for the scheme. As the scheme was ran on a first come, first served basis the farmers approached us for stocking loans and we provided them.

We provided the loan terms to match the purpose. As I said in my opening statement, if the purpose was to purchase stock that would be for sale within a 12 month period then loans were given for up to 12 months. If the loan was sought to replenish working capital that had been used to partially construct a farm building then the loan term was up to six years. The terms varied, depending on the purpose of the loan.

My colleague, Mr. Cullen, will talk about interest rates.

Mr. Eddie Cullen:

We have some data on the overall terms.

Dr. Ailish Byrne:

Yes. A third of our loans are for less than one year. As much as 54% of the loans that have been drawn down to date are for a four-year term.

Mr. Eddie Cullen:

Earlier Mr. Cunningham gave a comprehensive answer on interest rates but I will make a couple of comments. Ulster Bank has an opportunity to compare Ireland and the UK, particularly in the area of SME franchises. We have seen little different in SME margins between this economy and that of the United Kingdom, which reflects some of the points made by Mr. Cunningham. The economy in the banking sector is similar in Ireland and the UK when compared with the Continent where there are some significant differences. Another issue came out in the presentation made by the Strategic Banking Corporation of Ireland, SBCI. It revealed that the capital held by Irish banks, on balance, is higher than the capital held by European banks. I will put that in a more technical manner. The risk weighted asset intensity in an Irish bank is significantly higher than a European bank. Some of that is due to the legacy position because the capital one carries relates to the recent impairment. That is just the technical way that capital is calculated in banks. I do not think one can say any Irish bank is creaming it when one considers the returns in capital being generated by Irish banks is, in general, in single digits. That is the reality of where we are at. It is important to make a distinction between how the European economy operates versus how the Irish or UK economy operates. That drives some of the differences.

I will add, in terms of the presumption that there was some sort of targeting of the tenor. In Ulster Bank, as I think in all banks, we proactively engaged with the Department, the Minister and the SBCI when the product was put to us. There was a very narrow window to carry out a lot of work to get the product ready and make sure our front-line staff were ready to deal with the product. In our business, as the committee has heard when Dr. Byrne made her presentation, there was a very narrow window when the applications came in. We did a lot of overtime and weekend working was necessary to deal with the volume of applications. We took the product at face value and delivered it to the market and our customers, based on where the demand came from.

Photo of Willie PenroseWillie Penrose (Longford-Westmeath, Labour)
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I thank the delegations for attending. Like my colleagues, I was disappointed with the take-up, particularly by the horticultural sector. I thought part of the programme was to deal with cashflow, support, and addressing the impact of sterling, the exchange rates and lower product prices. I was disappointed that the horticultural sector did not get much from the scheme even though it has liquidity issues.

It has been said that there was a limited opportunity. Nevertheless, there appeared to be a great rush to pull down the shutters on the scheme. Having heard the AIB's presentation, I wish to acknowledge that it did the honourable thing. As far as I can ascertain, the AIB ensured that anybody who had applied for the scheme, notwithstanding that the bank had run out, it extended the same terms to everyone who applied. Am I correct in my assessment of the situation? If so, fair play to the AIB for doing so. I wish all of the other banks had followed suit. I wish to acknowledge AIB for its efforts now in lieuof what I will mention later.

I thought this scheme would provide a flexible source of working capital and it would be used to pay off the more expensive merchant credit, etc. Like Deputy Cahill, having read the presentations, did the banks handle the scheme for the prospective period going forward rather than retrospectively? I thought the loan would be used to pay off debt that had accumulated on a retrospective basis. Unfortunately, that message has not been conveyed in the presentations. Perhaps I have misinterpreted the presentations. I would like the matter clarified.

What amount of subsidy did each bank receive for administering the scheme? The SBCI had made €25 million available. What was the period involved?

Notwithstanding all that has been said about capital ratios and legacy issues, it is hard to dispel the public notion and viewpoint that banks rob people, particularly as interest rates are punitive. The credit union movement has a multiple of billions of euro but it is compelled by law to place its deposits with the banks. However, the banks charge the credit unions for the privilege. What has happened to all of that money? We have made loans cheaper. If the banks are compelled by law to make the money available then why not do so at a cheaper rate? A sum of €9 billion is a lot of money but the credit unions have not got much of a return. The credit union movement would rather invest in property. Again, due to legacy issues the movement is prevented from investing in property and that is why it has sought alternatives. Perhaps the credit unions can help alleviate the mortgage problem and build houses. I hope that the Government will grasp the opportunity and allow the credit union movement to operate in the housing sector.

How does each bank deal with bad debts? Every business has bad debts. I have experience of how one of the banks cut off its overdraft facility for small businesses in the midst of the crisis. That was unhelpful to small businesses and I have real evidence to support my claim. Can the banks assure us that they have no plans to hive off agricultural debt, or people who are in debt, to the vulture funds and they will be allowed to borrow from the banks? Can the banks guarantee that such debts will not be hived off to vulture funds? Only four months ago Ulster Bank was involved in a situation where debts were going to be hived off to vulture funds. We all know what vulture funds have done to people. I hope that the banks are not planning to hive off debts to the vulture funds. People borrowed in particular circumstances and had a particular concept.

I have always held the view that if everybody levels this charge against anybody, let it be in any industry, small, medium or large, farming or anything else, that if there was imprudent borrowing then there was certainly imprudent lending. It takes two to tango. I would be deeply concerned that vulture funds would ever become part of the norm. I would support laws that would curtail such a scenario because I have seen the damage that vulture funds inflicts on people. I hope that the banks will give an assurance that vulture funds will not form part of future developments in the banking sector.

Many people have suffered. A lot of people would state everybody has suffered except the banks. This is a well held and well-founded perception. It may not be a perception, it may be reality, which is different to perception.

We have come through the rough times, and it is individuals and businesses who have come through the rough times in this regard. The Irish people have put their shoulders to the wheel and saved the banking system. I hope there would be reciprocity from the banking system now towards people who may find themselves in extreme difficulty. What is the average overdraft rate charged to the farming community? People can borrow money for virtually nothing. Ulster Bank made a comparison with what is available in England because it has a reach into England, and that is fair enough.

My colleagues in Fianna Fáil are still concerned about mortgage charges and its spokesperson, Deputy Michael McGrath, tabled a Bill which went through the Dáil. He did not do this off the top of his head. He did it because of significant public requests. The witnesses are dealing with a specific sector of banking so I will not ask them to deal with the mortgage situation. It reflects the overall view and where people are at. What is the standard margin the banks charge over the European rate at which they borrow? What is the administration cost of the loans? What are the built-in margins? There are administrative and handling costs and we appreciate this. They must be covered and business is business. There has been a contraction in some of the banks of the availability of service to the public, and there have been closures in recent times and announcements of closures throughout the country. This must be taken into account also. In this regard, what is the standard margin at which the banks operate?

Photo of Charlie McConalogueCharlie McConalogue (Donegal, Fianna Fail)
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I do not want to go over the points already made. It strikes me from what has been said that the structure of the fund is such that the margin to the banks at the end of the day is similar to what they would get in the normal course of lending. The product to the farmer is cheaper, but the margin for the banks is the same. Whether they were to lend through the Strategic Banking Corporation of Ireland, SBCI, fund or to continue to lend through other products they have available is neither here nor there because of how it is structured. Will the witnesses elaborate on the structure? What is the percentage administration fee they receive? How much of the reduction in interest rate is down to the fact that default is guaranteed by the SBCI?

Another issue which has been touched on is the length of loans. There is a €150 million loan fee, and €25 million of this is a combination of Exchequer and European funds. This money, if I am correct, is used for the administration fee payment to the banks as well as the guarantee aspect of it. The calculation at the outset would have allowed for a fund of €150 million. This was supposed to be for up to six years. Was the €25 million of Exchequer and European funding sufficient to cover the cost if all the lending handed out was for a six year term? Was there an agreement between the banks and the SBCI that there would be a certain amount of lending for two, three or four years?

The tillage sector in particular was a hot issue and continues to be so even though the Government has followed through on a commitment to consider a fund for those affected by the weather. With regard to the localised impact on the sector last year in certain parts of the country where people lost crops, did the banks see a take-up in the areas which were most affected? I know it was localised and it was a small proportion. Certainly the Government and the Minister indicated it was their intention this would be something which would support the sector. Did the banks see any evidence of this with regard to how it was drawn down?

AIB indicated it is taking all applications. Am I right to state that Bank of Ireland and Ulster Bank are simply running up the maximum amount available to them within the fund and that others will have to apply for other products? Ulster Bank indicated it is operating a waiting list.

Photo of Pat DeeringPat Deering (Carlow-Kilkenny, Fine Gael)
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We will start with Ulster Bank on this occasion.

Dr. Ailish Byrne:

The horticulture sector is very small with regard to number of producers, particularly in the mushroom sector which was predominantly impacted by Brexit prior to Christmas. A handful of them have applied for SBCI funding and have been approved. The sector is very small, which is why it does not figure in some of the major headlines.

With regard to retrospective financing of working capital spent on farms, it has gone out retrospectively to the pig sector with regard to clearing merchant credit bills and mostly to those in the dairy sector who did expansion work on their farms after the abolition of milk quotas in 2015. These are the two main sectors which looked for retrospective financing under the SBCI product. The beef sector looked for future financing for the purchase of stock, feed and fertiliser up to 2017.

We have dealt with the structure of loan terms and how they have been provided over various terms. This has been adequately dealt with. With regard to the tillage sector and localised weather, particularly in Donegal and along the west coast, there have been issues where tillage farmers lost crops completely. They were left in very difficult situations. We have dealt with them on a one to one basis because the group of farmers in this situation very small. They are also facing difficulties this year, with grain prices being predicted to be no higher than last year. The good growth we are getting at present is driving on disease in crops. It is a difficult period for these farmers. The SBCI will provide one solution, but it is a sector with which we need to continue to work closely to get it through a difficult number of years rather than a particular point in time.

We have a very limited waiting list. I am hopeful we might be able to get the people on the waiting list onto the existing scheme. Some people may not progress with applications that have already been made or some may have applied for the maximum of €150,000 under the scheme, but when they come to draw it down they will not need the full funding. I am very hopeful we will be able to accommodate our customers on the waiting list through the existing product.

Mr. Eddie Cullen:

Deputy Penrose asked a question on loan sales and Ulster Bank has done a number of loan sales. All banks in the eurozone have been under significant pressure from the regulator of the ECB on their non-performing loan books to try to reduce the percentage of non-performing loans on bank balance sheets and ensure they are open for business and are making credit available to customers.

In our case, Ulster Bank was not part of NAMA. We were bailed out by the British taxpayer, not the Irish taxpayer. We were not part of NAMA so we carried all that non-performing debt on our balance sheet. We engaged in loan sales. The last such loan sale, which was labelled Project Oyster, last year included some designated farmers, and we would have engaged with lots of stakeholders, both farming bodies and politicians. As we explained at the time, the "farm debt" we sold as part of that last loan sale was farmers who had off-farm debt, typically commercial real estate. We did not sell any debt that farmers had borrowed for the farming enterprise. Our experience historically over the many decades we have been involved in agri-lending is that farmers who invest in the farming enterprise perform very well when one takes it through the cycle view.

We have now reduced the non-performing loans on our business banking side to a relatively low level. As to whether I can predict the future and say it will never happen again, I cannot say that. Ulster Bank has come to a much more normalised level of non-performing loans on our business banking balance sheet. That has been a very positive thing for Ulster Bank in terms of its go-forward position and its ability to work with customers and make new credit available off a loan book of a little over €5 billion. We advanced new credit of €1.3 billion into the economy of the Republic of Ireland last year, which relative to the overall size of the Ulster Bank book is a significant level of new credit. About half of that was to new customers as opposed to new lending to existing customers. I hope that gives members some clarity on that point.

Photo of Pat DeeringPat Deering (Carlow-Kilkenny, Fine Gael)
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I thank Mr. Cullen.

Dr. Anne Finnegan:

I thank members for their questions. In response to Deputy Penrose's question on the horticulture sector, I tend to agree with Dr. Ailish Byrne that it is small in terms of the number of operators and the debt levels in the sector. I think that is the reason it is not featuring in the overall numbers and is not coming out strongly, but that is not to say those in this sector have not availed of support under the scheme from AIB. On the question of working capital for 2017, it was legitimately part of the scheme eligibility criteria and farmers presented with applications for that purpose, and where their applications were successful, we honoured that and met the needs of others who had pent up demand for working capital.

In response to Deputy McConalogue's question on the tillage sector, we worked with the tillage farmers who were affected on a localised basis in and outside the scheme. I cannot speak on the figures because I have not looked at the breakdown along the west coast and in particular branches. That is an ongoing tillage sector. Dr. Byrne is correct that the challenges the tillage sector and some operators faced last year were more pronounced given the weather difficulties they experienced. There are strategic challenges for the tillage sector. This is the fourth year of depressed prices, which is putting significant pressure on tillage operators, particularly those who are working on large scale conacre and trying to service it on an annual basis. When one looks at the stocks to use ratio internationally, in the past we would have said that a weather event would sort out the problems with the level of stock build ups that are there, not that we wished for a weather event in any part of the world. That is not the case at present. It would take three or four weather events to sort out the type of stock build ups that we are seeing in the tillage sector globally. We are seeing the impact of the access to technology, particularly genetically modified organisms, GMOs, across the world. Every year the tillage harvest globally is high and that is putting pressure on Irish operators. Apart from the impact of the weather on certain individual tillage farmers last year and outside of what this scheme could deliver for the tillage sector, there are wider strategic challenges for the tillage sector and, indeed, for the livestock sectors because we need feed security in Ireland in order to sustain the growth in the livestock sector.

Mr. Ken Burke:

Members had questions on how the scheme operated in the context of the level of Exchequer funding. I believe the chief executive of the Strategic Banking Corporation of Ireland, SBCI, appeared before the committee. It was very much for SBCI to negotiate how that operation worked in terms of the funding it had received.

From AIB's perspective, we bid for a certain element of the fund and the arrangement is that there is no upfront payment to AIB. Effectively, AIB and SBCI agree a list of eligible loans and then in arrears, as interest is charged to those customers, details are forwarded to SBCI. Within 30 days of receiving that report, SBCI transfers an interest subsidy to AIB. As Nick Ashmore would have said, the scheme is cost neutral. Why is it cost neutral? The answer is that, effectively, AIB opened the scheme to more customers than would normally be eligible.

On the point about customers who were experiencing cashflow difficulty or who did not have collateral to post, we were very explicit that no additional collateral was required and we relaxed our lending criteria to allow more challenged customers into the scheme. That interest subsidy is paid in arrears. In the context of the risk sharing element of the scheme, in the unlikely event that an account becomes impaired, we report that to SBCI so the bank will follow it up and chase repayment from the farming customer in the ordinary course of the event. If there is a loss to the bank, SBCI transfer 80% of that loss in the individual case to the bank up to a cap of 12% of the portfolio level perspective. There is no upfront payment to the bank - it is very much in arrears - but equally if the bank was to reclaim money from that borrower, we remit the money back to SBCI so there is a net effect in that context.

Deputy Penrose raised the question of overdraft rates. I hope I have dealt with that in the context of AIB's SBCI facility of 4.5% and our foreign credit line of 3.825%, which works alongside the normal overdraft rates. It is up to customers to decide how they work their overdraft with other forms of lower cost funding.

On the question of the AIB's credit experience with the farming sector, thankfully our loss experience with the farming sector has been much less than other sectors. If we look at every euro that we have afforded to the farming sector, 67 cent is in credit funds with the bank. Those amounts are only increasing. Our loan loss experience with the agri sector has been comparatively better than other sectors and no different from the way AIB works with private customers in difficulty. Where customers are co-operating, we want to ensure we keep customers in homes and in businesses, and we work with businesses to find an acceptable solution. That is foremost in our mind, and acutely so in respect of the agri sector. We acknowledge that some elements of our agri portfolio did go off balance sheet and take on other forms of investments, and we are dealing with those as sensitively as we can.

Mr. Mark Cunningham:

I thank the Chairman and I will follow on from Mr. Burke's comments on the nature of the scheme. There were detailed discussions with SBCI as to the manner in which the scheme was going to be administered. Effectively, if we look at an unsecured agri rate, the rate is 6.75%. The rate that has been provided under this scheme to farmers on an unsecured basis is 2.95%. Effectively, the difference between the 4.95% rate and the 6.75% rate is a form of risk sharing, the different lower capital levels we will require for the lower level of risk we will be taking on because of the guarantee that Mr. Burke referred to. Detailed calculations were done between Bank of Ireland and SBCI, looking at historic past performance and the average life of the loan book to ascertain what was the appropriate level of discount and the price at which the loans should be offered. It is not a straightforward subsidy. When one takes the figure of 2.95% and adds the 2% margin - effectively, a 2% subsidy is given to the banks such that it will cover our credit losses - and given the lower losses that we anticipate and the administration cost, it will be cost neutral for the banks in terms of operating this scheme. That is the manner in which this scheme was devised. I have no doubt that SBCI can make the detailed calculations available to the committee, should it look for them. That is the manner in which the fund is structured.

Photo of Charlie McConalogueCharlie McConalogue (Donegal, Fianna Fail)
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Mr. Cunningham mentioned that the bank negotiated with SBCI on the average loan term of the book and that the issue was discussed. Let us take the figure of €65 million that Bank of Ireland received. Did Bank of Ireland receive that figure on guesstimated average loan?

Mr. Mark Cunningham:


Photo of Charlie McConalogueCharlie McConalogue (Donegal, Fianna Fail)
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It was not based on all of that €65 million being in six years.

Mr. Mark Cunningham:

No. It was not guesstimated. It was based on a detailed look at the historical loan tenor of the book; the volume that would be in stocking loans; the percentage that would be in stocking loans; the percentage that would be for capital expenditure; and the percentage that may be for land purchase. Land purchase was excluded from the scheme, so we extracted land purchase from the figures. The average life of the loan book and the manner in which the loans had performed historically was taken into account with a view to coming up with what would be a suitable average life for the scheme. The historical credit losses we have incurred on those loans were taken into account. That was then used to come up with this loan-loss guarantee up to that 80% limit and the 12% cap to which Mr. Burke referred. All of this gave rise to the 2% subsidy that was arrived at in terms of calculating the loans under the scheme.

On the drawdown, unlike other SBCI funds which are capable of being redrawn, there is a hard stop on this money in that the money must be drawn down by 31 December. If the money is repaid earlier, the money here under the scheme is not capable of being redrawn. There is a finite life to the scheme. Hopefully that clarifies its nature.

There has been considerable discussion about tillage farmers. Over 70 tillage farmers have already drawn down loans under our scheme. Some 9% of our loans have been for tillage farmers and the average size of the loan for tillage farmers in the bank's case is €45,000, which is higher than the €31,000 average for the rest of bank's customers. I would not like members to be under the impression that tillage farmers have been excluded. Indeed, as a percentage of the overall size of the loan book as has been indicated, there is a proportionate level of drawdowns in connection with that.

Deputy Penrose asked about the margins and the average price. Margins and bank margins are a matter of considerable scrutiny and debate by analysts. Banks call out the net interest margin as a topic in their results and statements. In Bank of Ireland's case, we have a net interest margin on our lending of between 2.23% and 2.26% on our loan book over the course of the past 12 or 18 months or so. That figure is disclosed and given to the market at every reporting period.

Photo of Tim LombardTim Lombard (Fine Gael)
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I apologise for my absence earlier; I got caught in votes in the Seanad.

It is great to have representatives of the banks here to discuss this very important issue. How is this scheme expected to play out in the future? Will it be the model that will be used for banking and financing of agricultural products in future or will it be a once-off? The Government has already put money into TAMS and other products. Is this the appropriate way for the Government to put finance into the agricultural sector, which would be a major change in policy? Is this the appropriate model for the future? Should there be a scheme like this every year. Given that some banks had this scheme filled in 19 or 20 days, the appetite for this scheme was absolutely amazing.

A key aspect of the scheme is the six-year term. Many farmers were under the illusion that they would have the ability to draw money down over six years and have the first two years interest free. They were deeply disappointed when they went through the process. Some 30% of the farmers got the money over a one-year term, which was not what they were looking for. They were hoping to spread the money over a longer term, but did not have that opportunity. With 30% of farmers having it paid back in one year, it is a major issue. We need to look at the criteria. Those figures were produced last week by the banks themselves.

I believe 19% of the farmers got the money over six years, which was the big thing for the farmers. They looked at the scheme as one where the first two years were interest free with the principal paid off over the following four years, but only 19% of farmers availed of those full terms and conditions.

Should the terms and conditions be broadened so that the majority of farmers could have the opportunity to use it over six years? Many in the farming community look to hedge their bets and put term loans into a period of five, six or seven years. Very few have the capacity to pay it off in one year.

I ask about the terms of conditions the banks then applied on this loan. Was the policy that farmers who got this loan were required to clear existing stocking loans? Were they required to produce letters of security from solicitors regarding payment of these loans? Did the banks look for security, which would be in contravention of the scheme itself? I seek clarification because of rumours that exist.

I again apologise for my late arrival.

Photo of Pat DeeringPat Deering (Carlow-Kilkenny, Fine Gael)
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Before returning to Mr. Cunningham, I have some questions. There is a high level of demand for this product and all three banks have waiting lists. Co-operatives, such as Glanbia with its milk flex loan, are developing similar products. Is it fair to say that the banks are playing catch-up in providing credit to the farming sector considering that the co-operatives are already doing this? It took the Government to come up with a fund and we have been waiting to a certain extent for the banks to come to the party to provide the funding that is badly needed as indicated by the demand.

I come back to the issue with the tillage sector. Mr. Cunningham explained the figures and some of the localised issues. Would it be fair to say that the tillage sector and the pig sector have not been availing of the fund in large numbers because of their difficult circumstances? Following a number of difficult years, they do not have the same ability to make repayments. Tillage farmers in particular have had four or five very difficult years and have had to contend with weather events. Is that why they have not been coming forward and are not able to access the funds?

Mr. Mark Cunningham:

The Senator asked if this should be the nature of the scheme. As he may be aware, there are considerable EU constraints and restrictions on the manner in which the scheme could be used. If the SBCI, the Government or anyone else wishes to introduce a scheme, all the banks have indicated that we are more than happy to co-operate to figure out how it can be done. Members have seen that this is of a very limited nature with a very hard drawdown time stop on it. It does not seem likely to be a blueprint for schemes to be looked at in years ahead. However, should the Government wish to pursue it, we would be more than happy to facilitate it.

The issue of the term of the credit scheme received some airing earlier. The point that may be being missed here is that normal bank terms and conditions apply to the scheme. Normal bank terms and conditions apply if somebody has a one-year loan. Somebody with a one-year stocking loan or other product should only get a loan for that product over one year. Somebody considering a capital expenditure programme with a longer-term payback on the capital expenditure could get a loan over a longer-term period. Perhaps in some instances the nature and benefits of the scheme may have been somewhat oversold with the perception that two-year interest-only six-year term loans were being provided here. However, what was not looked at was the small print. Normal bank terms and conditions apply. If the purpose for borrowing this money is for one year or for two year, that is the basis on which the loan should match the term of the asset they are seeking.

I have no evidence and would not be party to any suggestion that we were looking for security, given that the security-free nature of these facilities was one of the conditions of the scheme. I have no evidence of that.

The Chairman asked if the banks are playing catch-up.

All the banks sell in this market is money. Many people choose to offer credit subsidies or upfront zero percentage interest rates, whether they are selling furniture, cars or trying to buy in milk, to try to entice farmers or purchasers to purchase their stock. That is clearly something those businesses can do, but it is not something the banks can do. The banks are making their profits from selling the loans; the banks must make the profits from that loan or lending product. There is no doubt that, particularly in the milk sector, there is intense competition between the co-operatives for this extra milk and to manage or process it. Many of the co-operatives may be seeking a way in which they can add additional terms and benefits to their milk processing or milk supply agreements by trying to entice farmers in supplying credit to them. We have certainly seen it in the motor trade, the furniture trade and the store trade. It is more indicative of the co-operative sector coming to terms with the rest of the merchandise sector.

In terms of the tillage and pig sectors, we can only speak to our own statistics. We have seen no suggestion that these people are not in a position to pay their debt or have not been in a position to avail of the scheme. The numbers we have seen would be broadly commensurate with the level and volume of applications we would see across our book. Perhaps the timing for the sector might not have been the most appropriate and it might not have been as tuned in, but the volume and level of applications are broadly similar to what we are seeing across our broad book.

Mr. Ken Burke:

I will respond to Senator Lombard's points. I am conscious that the Senator did not have the benefit of hearing some of the discussion earlier. He spoke about some of the statistics he had regarding the term of the fund. From AIB's perspective, only 5% of our funds are drawn in less than one year so far. The converse of that is that 72% of the funds drawn have been for four years or more. Certainly, we have not been trying to encourage farmers into shorter term facilities. I have our brochure-ware with us today. Our brochure-ware is very clear and explicit that no security will be required for these loans, so there was no question of additional security being sought or indeed constructs where we deliberately sought reductions or early repayment of other facilities. I can be clear from that perspective.

In terms of our broader relationship with SBCI, we were happy to have the €60 million cashflow support fund as part of our suite. We have €400 million of other SBCI funding out to SMEs and 27% of that funding has been going to the agri sector. We have a very strong relationship with SBCI and we are looking at how we can be as innovative as possible to give farmers easy access to credit and the lowest form in cost of credit. We are very happy to work with SBCI on a go-forward basis to see how we can be innovative and creative for the sector.

My colleague, Anne Finnegan, will respond to the Chairman's question.

Dr. Anne Finnegan:

With regard to the demand we are seeing, the reference to Glanbia's products and playing catch-up in the market, the context in the farm banking market is that the overall lending to the agri sector peaked in the first quarter of 2009, on the back of the scheme of investment aid for farm waste management, at €5.2 billion. At this point, we are 42% down on that level of debt in the sector. That is the overall context in which all farmers are operating. They have paid down debt substantially. They took on debt at a period of time to deal with a specific compliance issue and they have paid down debt since then. Since April 2014, we have brought forward two €500 million funds ring-fenced for the agri sector. The second of those is almost 90% complete at this stage. I am confident that we have come forward and made the funds available to the sector, and that there has been an appetite and an uptake from the sector.

In terms of dealing with the cyclical issues in the sector, before the difficulties and the volatility we have seen in the dairy sector in the past six or seven years and further back with the cyclicality we would have traditionally seen in the pig sector, it has always been AIB's position to work with the sector on an annual basis to deal with the cyclical problems that might exist. It is difficult to find one solution that fits all problems and all farmers' difficulties when there is a trough period. We all need a suite of solutions in our armoury to deal with the nature of those problems in a particular year.

This was a very effective solution from AIB's perspective and we were delighted to have it available to us in quarter 1 of this year, but there are other things we need to do to work with our customers, and not all problems will have been solved with this scheme, nor could they have been solved.

Regarding the pig and tillage sectors, I am confident that our pig and tillage customers came forward to avail of this scheme. In terms of the pig sector, notwithstanding the difficult margin year that the sector experienced in 2016, we did not see any particular signs of stress in our pig book last year. We saw quite a bit of investment in the sector last year. That has been an ongoing phenomenon from AIB's perspective. We bank a group of very resilient pig customers so when the sector is in a trough, they have a capacity to maintain their position. That is a testament to the efficiency and financial astuteness in management of the operators in that sector.

This scheme has done what it can do for the tillage sector, certainly in respect of some of the built-up problems that existed from 2016. We recognise the challenges that exist in the sector. That has not dimmed our view of it. It is a critically important sector for Irish agriculture and it is critically important for our livestock sectors. AIB recognises that the challenge for us on an ongoing basis is to work with our tillage farming customers and look at how they manage their exposure to the grain markets on an annual basis, and how they ring-fence their own position, particularly those people who have large conacre bills on an annual basis.

Dr. Ailish Byrne:

To take Senator Lombard's questions first, on the term that Ulster Bank has extended, over 50% of our loans have gone out over the four year period. It is very important that the terms of the loans match the purpose of the facility so we have to make sure that if a farmer was buying stock in 12 months' time, the loan was cleared on the sale of that stock. Also, people were looking to use it to purchase feed or fertiliser for the 2017 season. It is good business practice on the part of the farmer that he or she clears that facility after the 2017 period and does not let it run into future years. As the Senator said, however, we have given terms up to six years for farmers who had used their own working capital in previous years to do capital expenditure work on their farms such as farm buildings, etc.

Ulster Bank did not look for security for any of these loans and no letters of security were sought from solicitors under this product. One of the definite rules around this scheme was that security was not to be sought and that a guarantee was provided by the Strategic Banking Corporation of Ireland, SBCI.

As to whether we are playing catch-up, as far back as 2014 Ulster Bank introduced a dairy farmer tool kit for our dairy farmers in recognition of a cashflow pressure they would experience with a low milk price. We put individual solutions in place for the pig and horticulture sectors because each individual farm business can be unique in those sectors. We did not have an over-arching scheme for them but we put tailored solutions in place for individual farm businesses.

Coming back to the tillage and pig sectors, we have lent significant volumes under the scheme to both of those sectors. In terms of the size of those sectors within the overall agriculture industry, and particularly the pig sector, they are the sectors that have got the maximum number of loans of over €150,000 over a six year period. They have been used to clear out merchant credit debt.

Mr. Eddie Cullen:

To pick up on Senator Lombard's opening point on our view of schemes like this for the future, we spoke earlier about the differences between the European banking market and the Irish or even the United Kingdom banking market. Schemes like this are one of the key characteristics, and the SBCI and Nick Ashmore are on record that this is where their attention is turning to. Like the other banks, we have been working a lot and proactively with the SBCI to see how we can deploy more guarantee schemes into the future. My view is that we will see more of these schemes. There is appetite in the European agencies to deploy more firepower to Ireland and I believe the SBCI wants to do that. My view is that, as this scheme has done, it opens up credit in areas where perhaps banks were not able to make credit available previously.

That works from our perspective at a cheaper price point, as Mr. Cunningham has outlined, so I believe we will see more of these schemes in the future. We are very willing to support them in Ulster Bank.

Photo of Pat DeeringPat Deering (Carlow-Kilkenny, Fine Gael)
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Do members have any other questions? In that case I thank the witnesses for coming before the committee today to give us an update on the scheme. It is important to point out that this is a very positive scheme. It would not be as positive if there was not the level of interest in it. I would not like anybody to leave the committee today thinking it was a negative scheme.

As there is no further business, the meeting is suspended until 4 p.m. next Tuesday.

The joint committee adjourned at 7.05 p.m. until 4 p.m. on Tuesday, 16 May 2017.