One of the hidden costs to farmers of the credit crunch of 2008 has been the greatly reduced competition between banks for our custom.
A combination of the UK government takeover of the Royal Bank of Scotland and Lloyds-HBOS, and a general tightening of lending, has made it much more difficult for any of us to access genuinely cheap credit.
Of course, money is cheap in the sense that interest rates are at record lows, but the margins that banks are charging on their lending are increasing at an alarming rate.
This was brought home to me recently when, out of the blue, my bank rang to inform me that the amount of interest I was paying over base rate on overdraft was about to double. My wife was at the other end of our rather long, narrow farmhouse, but soon appeared in my office with a concerned look on her face after she had heard me roaring my indignation at the unfortunate bank employee delegated to give me the bad news.
That was a month ago and I’ve only just started to calm down. The reason for my fury, of course, is that any self-respecting business person uses the amount a bank charges over base rate as an important measure of their financial credibility. Up to now this has meant that I generally have paid a very low rate of interest. In other words, my lenders have tended to look at me like “Germany”, hence my shock at receiving a call that made me feel that I had suddenly become “Greece”.
My initial reaction was to take offence; how dare the bank impugn my credit-worthiness by upping my interest charge? This was followed by bafflement; my trading is sound, my overdraft limit has not changed for many years, and the security the bank holds is as good as ever – so why the jump in rate?
Then I tried to be more analytical: the bank’s justification is that money is harder to raise, and so if a clearing bank is having to pay more to borrow, it has to pass on those costs to its creditors. And to be fair to my bank – having made a few calls to other potential lenders – it does seem that I am still on a competitive rate.
It seems I am not the only farmer who has been on the receiving end of increased bank charges of late. In conversations with farming colleagues and land agents, I hear plenty of complaints about the cost of borrowing and the cost of setting up even very modest new lending arrangements. A valuer I know tells me he was instructed to value a 400-acre farm, including the farmhouse, for a bank as a first step to putting some lending in place. Well into his second day of the detailed valuation of the farm, and conscious that the bill was running into several thousands of pounds, the valuer was astonished to learn from the farmer that all he had requested from his bank was a modest £30,000 overdraft facility.
All the time the Bank of England base rate remains at its current record low level, the financial pain caused to farmers by increases in bank charges and their interest rate margins will not be felt too keenly. But there are dangers ahead: total UK farm debt is now approaching £12 billion, and much of the current lending to farmers to buy land is reported to be on an interest-only basis – with no capital repayment schedules.
Once base rates start to rise, I fear I won’t be the only farmer bellowing angrily down the phone at my banker.
Stephen Carr runs an 800ha (1,950-acre) sheep, arable and beef farm on the South Downs near Eastbourne in partnership with his wife, Fizz. A third of the acreage is in conversion to organic status.