Committee Reports > List of Committees > Joint > 1979 > Committee on Commercial State-Sponsored Bodies > Report No. 10 - Agricultural Credit Corporation, Limited

MIONTUAIRISC NA FIANAISE

(Minutes of Evidence)

Dé Céadaoin, 28 Samhain, 1979

Wednesday, 28 November, 1979

THE AGRICULTURAL CREDIT CORPORATION, LIMITED

Mr. Michael Collins, Chairman; Mr. Michael Collins, Chief Executive; Mr. J. F. Hickey, Assistant Chief Executive; and Mr. J. McCloskey, Manager of Finance of The Agricultural Credit Corporation, Limited called and examined.

1. Chairman.—Thank you gentlemen for your very useful submission.* The Committee will address their questions to the chairman of the ACC who will pass them on to one of his colleagues or will deal with them himself as he sees fit. Do you want to make an opening statement?

Mr. Collins.—Subsequently, if you and your Committee feel it would be helpful, we would be pleased to bring you to some of the enterprises, small and large, we supported.

2. Chairman.—Thank you. Do you see your role as filling in the gaps that might be left by the general banking system, or do you want to take the initiative and take over some of the facilities available in the banking system?

Mr. Collins.—Just as the banks provide facilities for agriculture, we too see ourselves providing specific facilities for agriculture. We see our activities and their activities complementary and supplementary to one another. Because of our particular expertise and our virtual confinement in agricultural financing we believe there are certain areas where we have an advantage. But all sources of finance are necessary for agriculture and the whole totality could not be provided by any one organisation. We have ambitions to maintain and, if possible, increase our share but we see the commercial banks also playing an important part.

3. Chairman.—If it happened that a particular form of finance required by the farming community seemed to be adequately dealt with by the banks, would you be inclined to say: “We will let the banks handle that, and we will use our funds for areas where the banks are not being so helpful”? Do you want to compete in all areas?

Mr. Collins.—Not necessarily; to the extent that we concentrate on a particular type of loan where we believe we have an advantage, we will not utilise our funds to compete, for the sake of competing, with the banks.

Mr. Culligan.—If I might supplement our chairman’s statement. We feel that we provide a unique package of services. Very often there are occasions where our long-term or development type loans have to be supplemented by short-term credit facilities, if the farmer engaging in these borrowings is to be enabled to take full advantage of his development programme. We often find it necessary to provide the full range of services even though that brings us into competition with the banks.

4. Deputy Fitzsimons.—It was suggested recently in the Dáil that the ACC should be given a full banking licence. What is your opinion?

Mr. Collins.—We have a specific view on that. We do not suggest that Ireland is over-banked or under-banked, but to the extent that we progressively, at board and management level, are ensuring that to the best of our ability a comprehensive total service will be supplied at local and regional level, we will do everything other than cheque issues. As we said in our submission we have, by way of assignment, imposed disciplines which we believe are essential to us—that is, we must improve the strength of our balance sheet and attain over the next six years the normal liquidity ratios and so on that our competitors have to comply with. In the fullness of time should the Government feel that an agricultural bank per se would be of benefit, then only in the light of what we achieve would we feel we would be the ideal vehicle for that, but we are not seeking that per se. We are using it as a mechanism to give a fullness of service and back-up service so that should further banking like the Agricultural Credit Corporation be deemed advisable, we would be ready, willing and able to provide it.

5. Deputy Fitzsimons.—That is good to hear. I take it the associated banks would not be too keen on that?

Mr. Collins.—I do not think they have been too keen on it. We are encouraged by that because it means we are a source of very real competition to the associated banks.

6. Deputy Fitzsimons.—Competition is very good in banking services?

Mr. Collins.—Yes, because the most efficient will survive. The criterion is the pursuit of efficiency because to the extent that we are, and remain, efficient we will be entitled to be considered as another suitable bank for specific purposes.

7. Deputy B. Desmond.—Bearing in mind the current state of the 1978 ACC balance sheet, the stringencies of the Central Bank in terms of liquidity ratio before granting banking licences, and the capital structure of ACC, is it not very unlikely that the Central Bank would, in current circumstances, give the ACC such a licence?

Mr. Collins.—Far from it, they would in no way give it at this stage. We are setting 1985 as our aim to comply with those criteria.

8. Deputy B. Desmond.—How would you envisage building up to that situation?

Mr. Collins.—We envisage it as follows. In the immediate past, we have totally reversed the break-even, just loss, or small profit-making history of the ACC. We had a level of profitability in recent years that could be judged as acceptable. We see that the only way we can build up to be considered as a suitable banking organisation is to very comprehensively improve our balance sheet. We will have to do that by way of retained profits. We do not see any prospect of an equity investment from the Exchequer. We also believe that we should not have to get a further such investment from the Exchequer because we must stand on our own feet. The net inflow of our deposits over recent years has been most successful, to such an extent that the £143 million we advanced to agriculture and agri-business last year was in its totality met from loan repayments and from the net inflow of deposits. We must accelerate this to put ourselves in a position to strengthen what is, as you quite rightly referred to, a weakened balance sheet. Over those years, and with the good profit we made last year, we have absorbed the foreign exchange losses as a result of borrowing which the corporation engaged in immediately post-EEC entry. We courageously faced up to what we felt was the right thing to do in regard to that borrowing. We declared the extent of the foreign exchange losses incurred each year on the face of our balance sheet, and we set ourselves the discipline of a financial institution that our first priority must be to eliminate the losses. In September this year we totally paid off the unit of account borrowings and therefore cleared that out of our balance sheet.

In recent weeks we made strong representations to the Minister for Finance to enable us to borrow to supply the immediate and forthcoming needs of agriculture, £25 million, of which we are in the process of borrowing in Deutsche Marks and for which the State is carrying the exchange risk. Maintaining the rate of progress of recent years, and in spite of the current difficulties that agriculture is going through, we believe that by 1985 we will be well on the road to meet the criteria that would be imposed on us by the Central Bank and, understandably, would be demanded by our opposition, the commercial banks, should we be given the banking facility you referred to.

9. Chairman.—You say that by 1985 you would be in a position to meet the criteria necessary to apply for a licence, but would you want to apply for a licence?

Mr. Collins.—Not necessarily. Our feeling is that at that time it may or it may not be considered that a bank for the financing of agriculture would be necessary.

10. Chairman.—You would like to reach the position where you feel you would be capable of applying?

Mr. Collins.—We feel it would be much more realistic to do that first and then, in the light of the circumstances, we would be inclined to look for it, because in many cases our borrowers feel this one shortfall is a very real handicap. We must be realistic about this. The occasional demands for a further bank are associated with problems which have occurred in the commercial banks. Once these problems are resolved, the demand declines very rapidly.

11. Deputy Fitzsimons.—It was recently suggested by Mr. T. J. Maher, in a well publicised speech, that the IFA should think about setting up their own bank. What are your views on this?

Mr. Collins.—I would not presume to speak for Mr. T. J. Maher, but occasionally we have had discussions with the IFA on this. To be realistic, I do not see this in isolation or even as a prospect at all. We are very conscious of the vital urgency to us of the State guarantee for our deposits. We would not see farming organisations, individual farmers, or co-operatives, being in the position to provide the equity capital necessary to set up such a bank. There were references in the immediate past, which you may have read, with regard to a possible merchant bank being set up, with an association of Rabobank, ACC and farmer involvement, but that so far is talk. It is not a reality and neither my colleagues nor I see it ever happening.

12. Chairman.—Could we look at that from another point of view. At the moment, you have been told by the Department of Finance that you need not expect any further funds from them in the foreseeable future. I think you will agree that at the moment your balance sheet is not such that anybody would wish to subscribe equity to the ACC. Do you feel that, by 1985, you probably will be in a position to invite equity participation?

Mr. Collins.—We would hope so.

13. Chairman.—Is it possible that at that stage you might welcome equity from the farming organisations?

Mr. Collins.—Certainly, and the provision for involvement of the farming organisations in ACC was incorporated in the 1961 Act. Under that Act there is provision for seven directors—four nominated by the Minister for Finance and three elected. The specific purpose for that was that, in time, there was the possibility of farming organisations, or farmers themselves, being involved in the equity of the ACC, and the way to do that would be open. With my experience of farmers at present expecting a return on their equity investment, this is just not on at the moment, nor would we see ourselves getting equity capital from any large institutions.

In conjunction with the Department of Finance, and the Central Bank, we specifically wanted to look at the huge development of ACC in the seventies. This could be best exemplified by saying that our 50th anniversary occured in 1977 and in the three years to 1977 the total lendings of the ACC exceeded their previous 47 years existence.

We were very anxious at board and management level to define the objectives of the corporation appropriate to us going into the eighties and to set up the disciplines that we, as a financial institution, should impose on ourselves rather than have them looked for in the context that you and Deputy Desmond raised. We know we are setting ourselves a hard task. We believe that looking at the difficulties will spur us on to achieve the very best of our abilities and to ride the inevitable short-term setbacks that will occur. We should by then be in a position that, if equity capital is available from individual farmers through the co-operative movement and through farming organisations, we would welcome any such investment. From any discussions I have had with successive Ministers for Finance they would welcome that. They also feel that it is as far away as we indicate it to be.

14. Deputy B. Desmond.—One of the difficulties one has about your projected achievement of a share of about 6½ per cent of the total deposit market by 1985 is the incentives that would be necessary for depositors. What prospect is there of getting the Minister for Finance to give you the interest reliefs that building societies enjoy?

Mr. Collins.—It will not be for the want of reminding them of that.

15. Deputy B. Desmond.—Would it not be a major incentive if you had it?

Mr. Collins.—It would be a major incentive. At the moment the major ingredient to the spectacular sustained rise in our deposits has been the State guarantee. That has been vital particularly when we labour under the disadvantages, one of which you mentioned, that we do not have the tax concessions that the commerical banks have or the advantages that the buildings societies have. Therefore, the guarantee to us is very necessary. We would feel that it is vital for us that our deposit rates for the lower sums of up to £15,000 be always maintained at a competitive level.

For the very first time in the recent past, because of the increase granted to the commercial banks earlier this year, the competitiveness of our deposits has been slightly eroded. We will have a very satisfactory net inflow this year but it will not reach our budgeted inflow. We will be pressuring the Minister for such advantages. We appreciate the Minister’s difficulty very much at present. It is important that he and his colleague, the Minister for the Environment, hold a line with regard to building societies rates so far as they might, if raised, affect mortgages and so on.

The fundamental basic asset of this country is its land. At present, there is a certain lack of confidence in the future of agriculture and we must have the availability of funds to keep on the necessary investment in seasonal loans, fertiliser and so on. If that loss of confidence is neglected in a standing back from improving and maintaining the productivity of the land, it will take much longer than the one year’s lapse of doing that to recover output. We will be pressing for those advantages.

16. Deputy B. Desmond.—The Central Bank may well argue that it would be inappropriate to give a licence to a lending organisation which is confined to one sector of the economy—land purchase loans, farm loans, agri-business loans and so on. Are there any particular plans for the diversification of the range of commercial activities of the ACC to meet the possible insistence of the Central Bank on a more broadly based operation if you are to get a banking licence?

Mr. Collins.—Certainly.

17. Deputy B. Desmond.—What plans have you?

Mr. Collins.—We would see that, restricted as we are to the agriculture-agribusiness field, we are thereby prevented from providing loan facilities to a very substantial portion of our deposit market. Any increases in the amount of deposits for the ACC are coming from the urban areas. If an urban person deposited with us we are not enabled, because of legislation, to advance him for house loans.

In the field of banking we would regard it as imperative if we ultimately obtained a banking licence that we would have facility to have a current account for anybody anywhere in Ireland. We could not have it restricted solely to the farming situation. During the course of our development in that restricted area we still feel that, with the spread of the loans that Mr. Culligan referred to, the totality of our package, we are reasonably immune against a particular setback in a particular sector of agriculture. We see this as a deterrent. In the very substantial growth in our deposits from the offices we have opened throughout the country, which have an urban district base, it is a hindrance to us in our development that we cannot provide lending facilities for that substantial market. We have to face up to the rules under which we operate at present. We have to keep a sustained pressure on the Department of Finance and the Minister with whom we have had an excellent working relationship in recent years.

18. Chairman.—In general terms would you regard your resources as being inadequate for what you wish to do at present?

Mr. Collins.—We feel that we can maintain our inflow of deposits if we can maintain our margins and the loan repayments that are accelerating now because of the loans coming through with gale days and so on and the huge acceleration in the early seventies. The immediate needs of farming and agri-business can just about be provided at present. We would certainly see, and are using at present, the vehicle of the European Investment Bank as an ideal channel to supplement any shortfall that might occur through occasional setbacks in deposit inflow or the inevitable concessions we will grant to farmers anywhere who find themselves for particular reasons going through a difficult period. We would seek, to answer your question, current inflow of deposits plus loan repayments, plus the availability of the European Investment Bank funds and also the availability, which I feel will be very necessary for agriculture in 1980, of permission to go and get funds from EMS countries in particular—Deutsche Marks or Euro-Deutsche Marks. We immediately, after being granted permission by the Minister, went out and arranged the inflow.

It is necessary, having gone through the Dáil, that the present Bill go through the Seanad to authorise us to increase our borrowings. The moment it is passed we are at take-off point to utilise the totality of that £25 million and we will be knocking at the door for more. We would see those sources as providing sufficient funds for us over the period.

19. Chairman.—You have not really answered the question. Is it sufficient in the sense that you know approximately what you are capable of getting and that you are basing your activities on what you know you can get?

Mr. Collins.—Yes.

20. Chairman.—Would you be able to deal with a good deal more? If the Minister for Finance offered you another £10 million or £20 million would you be glad to get it or would you say: “We are doing all right at the moment as we are”?

Mr. Collins.—Provided we felt that it could be on-lent for productive purposes and support men who maintained their trust in farming and their initiative in themselves and their ability to get on, yes, we feel confident that we could benefically utilise a sum which you quantify as £10 million. You will appreciate that we have a corporate plan as to how we reach our goals in 1985. We also realistically face up to the fact that there will be inevitable setbacks along the way.

Where a particular sector of agriculture is adversely affected, whether it is through extremely harsh weather or a setback in a particular trade, the Government have in the past come to us and asked us to make funds available to get farmers over that. We feel we would be able to supplement any shortfall by calling on the Government to enable us to take further funds from the EIB, dollars or Deutsche Marks or whatever was available. We are confident we can do that.

21. Chairman.—You mentioned the European Investment Bank. Does that play a large part?

Mr. Collins.—We have drawn several £ million from the European Investment Bank. Mr. Culligan and I are going over to sign for a further loan. This is in the nature of £2½ million and on to £5 million. We see it as ideal for this country to utilise for investment in agriculture.

Mr. Culligan.—It is confined to the food processing industry.

22. Senator Cooney.—I apologise for being late. With regard to the future, have the corporation begun to feel any effect of the credit squeeze and the situation where farmers incomes this year will drop in real terms? It would be extraordinary if that did not have some effect on the repayment of outside loans. Has it begun yet to have any effect?

Mr. Collins.—Yes, it has.

23. Senator Cooney.—Do you anticipate it having a bigger and growing effect? Could you give us any idea of the order of magnitude it may have?

Mr. Collins.—It has had an effect. We have clearly stated to farmers who have a difficulty that we will roll over their loans in these cases. We have earlier referred to the £25 million made available to us by the Minister for us to go out and to borrow Deutsche Marks. We have all the arrangements completed for that. We have a portion of the money already on-lent. Whatever difficulties farmers face in the immediate future we will be able to carry them through those difficulties.

24. Senator Cooney.—For how long and to what extent? Your profitability is very narrow and your projections for future profitability are not very wide either. Is your room for manoeuvre in carrying farmers, if the drop in real incomes and the credit squeeze continue for some time to come, limited?

Mr. Collins.—The best answer I could give is that it was strongly stated, at farming leadership level and in general through the farming press and the press at large, that there would be extreme difficulties for farmers meeting this November gale. That has not been the case. We have been refreshingly encouraged by the extent to which farmers have met this gale. One of the strengths of the corporation is that those to whom we lend have the very highest record in their repayments. It is only when they are genuinely unable to pay or hit a particularly difficult patch that they come to us; and we will stay with them. It would be very difficult in the absence, not being facetious, of the Holy Ghost to answer the projected length of the credit squeeze or problems you refer to. It would be difficult to quantify to what extent we will be asked to carry over farmers. I and my colleagues believe that we will carry it over. The November gale has been met to a considerable extent. It is a very rigid discipline that farmers and the agri-business have that they are going to meet their repayments on this.

25. Senator Cooney.—You carry your customers in difficulty to a greater extent than the commercial banks?

Mr. Collins.—I could not say.

26. Senator Cooney.—Would you reckon?

Mr. Collins.—In certain circumstances we would because we have an overall package to offer to a farmer. We would have certain facilities within that package of a moratorium or a year within the overall repayment period of the loan that he could forego the repayments of principal.

27. Senator Cooney.—I do not criticise that and would be entirely for it. Does it inhibit your capacity to become commercial in the full sense of the word?

Mr. Collins.—I was referring earlier to the disciplines that we have imposed on ourselves and the criteria we wish to meet within the coming six years. Part of that discipline is that we are commercial and in our objectives we quite clearly state that we will supply all the needs of agriculture commensurate with the proper return on our equity——

28. Senator Cooney.—If that dilemma has to be solved in favour of your commercial progress or the farmer, on whose side are you going to solve it in, say, 1982?

Mr. Collins.—If there is a feeling that the ACC should be used as a long-term prop to problems then we are very wrong, and farming would have gone very wrong. The only way that farming will prosper in this country is by an acceptance at every level that the world does not owe us a living. We have to meet the criterion in the small and the large farm that borrowing to supplement our income implies repayment of that borrowing. Where the relationship is such that for a temporary period we will carry this, we will. The vast majority of farmers, who are not as vociferous as farm leaders may be, believe that——

Senator Cooney.—Some leaders are.

Mr. Collins.—farming is still profitable. Price increases that came in the immediate post-EEC entry years undermined that determination and self-reliance to a degree. Now the realism is following and farmers see this. When any of my colleagues or I have spoken at seminars recently, it was to state that if there are problems in the immediate future, we will roll over loans to keep farmers going, and under no circumstances should breeding stock be disposed of because that is too serious. It is our conviction, from our experience, that the present problems are no way as bad as farm leadership would indicate. The reality of farming is that it is a business enterprise. Planned development and growth must be based on the earning of profits, taking into full consideration loan repayments and everything else. My colleagues and I feel that the potential of even the best farms has still, to a very large extent, to be experienced in the development of further stocking, fertilising and utilisation of the land. The more it is developed, the more productive it becomes and the more valuable the asset. Therefore, we are confident.

29. Deputy Fitzsimons.—In view of the fact that the ACC loans for land purchase have increased from 9 to 15 per cent of total lending in recent years, what is the ACC’s policy in relation to loans for land purchase? Would you consider that your policy contributed in any way to the rise in land prices? The associated banks have taken a fair bit of blame for this.

Mr. Collins.—Successive Ministers for Finance have always been very keenly aware of such criticisms being levelled at the corporation. The maximum amount the corporation will lend for the purchase of land is £50,000 to those who are depositors and £40,000 to those who are not. In no way could we be charged with having contributed to the rise in land prices. We have utilised whatever money we spent on land purchases to bring up the 50-60 acre farm to a viable family unit. You would not buy a lot of land with that amount of money.

30. Deputy Kenneally.—Can we take it that you do not finance any speculative land deals?

Mr. Collins.—Under no circumstances.

31. Deputy Kenneally.—You are quite satisfied that that is the position?

Mr. Collins.—Mr. Hickey, head of operations, will outline that position better. His staff put a value on a piece of land and a potential borrower cannot go beyond that; if he does, he is on his own.

Mr. Hickey.—To set the scene: before any application for land purchase is finalised we have what is called a local inspection carried out by one of our agricultural science inspectors. He assesses the home situation and the potential of that farm. Two years ago we did a survey on this aspect. The survey showed that the farmers’ average holding of land prior to loan application was 66 acres and the average additional acquisition by farmers was 33 acres. If you look at last year’s figure of £21 million for land purchase, the approximate number of acres we bought was just over 8,000 which, on a quick calculation, is just over £2,500 per statute acre. There is no question of entertaining any applications for speculation. We just could not do it. It is, as our chairman said, our basic philosophy to maintain the family farm as a unit. The way prices are going that means an escalation in acreage each year.

32. Deputy Fitzsimons.—Farmers who get in touch with me about the Land Commission acquiring big farms in County Meath, my own constituency, and dividing them between smallholders, often mention difficulties because of the land bond situation. I would suggest to them that, say, four farmers should go to the local office of the ACC and borrow, say, £200,000 between them—say, four sums of £50,000— and they should get an independent arbitrator to divide the farm between them. The price of land in Meath is very high and £200,000 would not buy very much. The problem they would say is that they need more than £200,000. It would be a solution if the ACC extended the £50,000 limit to each of the four farmers. The Land Commission are loath of late to acquire such lands. What is the ACC view on group applications?

Mr. Culligan.—We are quite prepared to consider group applications to buy large acreages of lands but we have to assess separately the credit-worthiness and repayment capacity of each individual member of that group. To clarify the point with regard to the maximum amount of loan which can be made available, it is £40,000 and only rises to £50,000 when the applicant is an existing depositor. In the circumstances you mention, it is unlikely that they would be existing depositors. We are quite prepared to consider such a case on its merits.

Mr. Hickey.—To endorse what Mr. Culligan said, last year the small farmers defence league met us and the board considered this proposition in connection with one or two estates. The board agreed to it in principle, but, as Mr. Culligan said, it depended on the assessment of each individual on his merits and his repayment capacity.

Deputy Fitzsimons.—I am pleased to hear that. When a Meath farm is up for auction, in no way will the Land Commission touch it, and this presents considerable difficulties for me when trying to deal with the situation at a meeting where a number of smallholders, who are pretty good farmers, want to extend their holdings into a more economic situation. I hope that, as the ACC expand, they will be able to cope with that kind of price range but I appreciate that this presents considerable difficulties.

33. Chairman.—The criteria you apply would not merely be whether interest and the principal could be repaid, but whether the person involved was a genuine farmer. No matter how good the security was, you would not lend money unless he was a bona fide farmer?

Mr. Culligan.—Genuine, yes.

34. Deputy B. Desmond.—Lending to merchants and co-operatives engaged in processing and ancillary services in some cases can mean big risks are being taken. What is your experience there? Could a few bad loans substantially distort the situation?

Mr. Hickey.—We feel that agri-business is a natural continuation of our on-farm lending and brings the entire spectrum of food processing into line. It could safely be said that up to a few years ago we had nothing to do with agri-business because we were concentrating so much on farm investment. On the sectoral side, there are worries. For instance, the pig sector is sick looking and very vulnerable. We try to spread our investment right across the agri-business sector. At the moment we have about £30 million out on loan which is small in relation to the total amount of lending and is divided by between £15 million short-term and £15 million long-term. Most of our investment in agri-business is coming through the European Investment Bank. These applications are very well vetted, not alone at individual factory level, but they are also deeply investigated in relation to the entire economy, in relation to the overall EEC situation. These are areas we are concerned about. For farmer customers we have no worries at present about their repayment capacity.

35. Senator Cooney.—Would it be any use if the ACC had the power of putting somebody on a board? Do you have that power? If so, do you exercise it?

Mr. Hickey.—Yes, and we go further than that. At co-op level, we have many co-op committees. For example, on pig co-ops and some dairy co-ops we have what we call observers—people who attend all the committee meetings every month and they keep us abreast of what is going on.

36. Senator Cooney.—Have you ever had to put any of these agri-businesses into liquidation?

Mr. Collins.—Not so far. But if we had to we would be prepared to take the opprobrium and contumely that would follow, because inevitably we would be blamed.

Mr. Culligan.—There was one case where we had to put one smallish company into receivership, but we were able, by taking a positive view, to ensure that it found its way into the hands of a stronger company which was able to maintain and develop it.

Mr. Collins.—In Deputy Fitzsimons’ own area we played a vital part in the revival of Mullagh by very careful and judicious handling. It would have closed down only for the support we gave and the disciplines we insisted on.

Deputy Fitzsimons.—I know by the expansion of your Navan office that your agri-business must have been successful.

37. Deputy B. Desmond.—What criteria do you have? Is it the ordinary commercial criteria for lending to the agri-business sector?

Mr. Collins.—There are occasions when we are asked by the Government of the day to support a particular organisation and, to an extent, the Government will help with the interest.

38. Deputy B. Desmond.—Would they be organisations which might have been refused by a commercial bank?

Mr. Collins.—I would say they had been refused, or else you have a situation where their financial position at the time with the commercial banks and the ACC was such that the commercial banks and the ACC would, to enable such an agri-business to survive and revive, continue to bear such extra lending on a proportion, on an agreed basis between them.

Mr. Culligan.—I should like to explain that our intervention in such a case, at the request of the Government, does not place our assets in any way at risk because invariably, in such a case, the Minister would guarantee the corporation against loss.

39. Chairman.—You seemed to suggest earlier on that the Minister might subsidise the interest?

Mr. Collins.—He has in certain instances, but also he would guarantee the totality of the loan.

Mr. Hickey.—The criterion we use in a commercial assessment is far stricter than for farm lending. We look for three years balance sheets, and for three years projections and cash flows. We also have our local area officer who knows the entire set-up at local level. He also knows the historical background of the co-op or merchant involved and the potential for development. That is one of our best sources. In many cases it is intuitive but that can be as good as balance sheets.

Mr. McCloskey.—In respect of funds we get from the EIB, we have our own internal assessment standards. We must also meet the assessment standards of the EIB who are very strict. Therefore, effectively, there are two vettings before EIB funds find their way into the hands of an agri-business customer.

40. Senator Cooney.—Am I right in thinking that the EIB standard of vetting is done by the county committees of agriculture?

Mr. Hickey.—No, the EIB themselves.

41. Chairman.—It could be suggested that by lending to agri-business you will have less funds available for farmers. What is your reaction to that?

Mr. Collins.—In recent years farmers have been very strong on their involvement beyond the farm gate—they regard these co-operatives as their involvement beyond the farm gate—and there have been difficulties in certain meat co-operatives, as Deputy Kenneally and I know. There have been difficulties in pig projects, as we know from the involvement of our experts and as Mr. Hickey and Mr. Culligan referred to, in bringing about a very dramatic, strong change without the iron fist being evident. It is very important in a situation like that to maintain at local level full confidence in the operation. If it was felt that a receiver/ manager was put in on the advice of the ACC, that could do very serious damage to the farmer concerned.

42. Chairman.—Because you do not have all the resources you would possibly like, it must be true that, to the extent that you lend to the agri-business, you have that amount of money less for lending to farmers; so to some extent, farmers are suffering. Are you suggesting that although that is so, your policy would have the approval of farmers because their interests are bound up in agri-business as well?

Mr. Collins.—Yes, to the sum of £30 million. It is very little in our overall lending and has not, in any way, deterred a farmer from getting money from us. Although we might have worries in certain areas, for several years we were building up very strong reserves to cover such eventualities.

Mr. Culligan.—If I may supplement our chairman’s answer with regard to the question of competition for funds between agri-business and the ordinary farmer, a large part of our lending to agri-business comes from the European Investment Bank. That source is not available for lending to the ordinary farmer, so there is no competition there. Another large part of our agri-business lending consists of seasonal finance provided to co-operatives and merchants to enable them to buy in grain. Very large sums can be involved in that. If we were suddenly to cut off the supply of those funds—say, coming up to the harvest—to a merchant who might require £1 million to buy the grain, the local farmers would be the people to suffer most.

43. Chairman.—There is no conflict of interests?

Mr. Culligan.—No. At a time when funds were scarce it has always been the policy of successive boards to concentrate resources at farm level.

Mr. Hickey.—The foundation stone of the development of the ACC is the local office. Each year, the ACC prepare a budget on their farm lending and agri-business lending. In conjunction with the Department of Finance we have talks in relation to the lending for a particular year. The actual budget and the overall result at the end of the year are extraordinarily accurate. Some years it is only £1 million out. If there is a conflict, as Mr. Culligan said, we cut back agri-business. The farmer will get credit and there is no question about that.

44. Deputy Kenneally.—What have been the advantages of opening offices around the country? Could it be alleged that you are getting too bureaucratic and too top heavy at management level by opening a lot of offices?

Mr. Collins.—In the middle seventies, as agriculture expanded so rapidly we were convinced that we would have to be down on the ground where the action was. We would not have the old situation prevailing where a farmer in the extreme of west Cork would drive past 25 commercial banks to get to our office in Cork. We established rigid criteria for the opening of these offices. The huge increase in the inflow of deposits has resulted from the opening of these offices. I will give an example of a particular county without any bias and that is county Cork. We had a head office in Cork city and we opened offices in Skibbereen, Kanturk, Bandon and Fermoy. The extent of the inflow of deposits generated in those offices was sufficient to cover the lending for farming in the areas in which those offices were. They in no way slowed down the amount of business done in Cork city itself. It is vital to us to have local knowledge of the farmers’ needs; and to identify our area and regional men with the farmers in their areas. The extent of responsibility to make a decision at local level and the amount of the loan to make——

45. Deputy Kenneally.—They have autonomy in each area?

Mr. Collins.—Yes, and it is such that at all levels we have been absolutely delighted at the extent to which our men have developed themselves in their strict measurement of this; and the delegation of this to them is one of our strengths.

Senator Cooney.—I can confirm that.

Deputy B. Desmond.—You would never believe it listening to them in the recent by-election.

Senator Cooney.—Hearing of farmers looking for credit and knowing how keen area managers are to get deposits, I can confirm it is an excellent service.

Mr. Hickey.—The local offices are the main plank of our marketing strategy. We planned for 1980 to have 50 offices. We have 49 today and we will have 50. We are extending slightly. We opened an office in Westmoreland Street and we are opening one in Dún Laoghaire which are different types of offices. They will concentrate on deposits which are the life blood of the organisation.

To respond to the original question as to whether we are becoming bureaucratic or overloaded, we have fairly strict criteria in which we assess whether offices should be opened or not. It is demanded of us that we provide a service, particularly to our borrowers. It is also demanded that we provide almost a banking service to our customers and that we get involved in the entire spectrum of the agricultural, economic and cultural life of a particular area. Therefore, if we look to see where to open an office we have a lot of things to take into consideration—for example, the farming pattern of the hinterland around a particular town, the potential for development, the amount of industry and the IDA plans for the area, how many jobs are going to be created, as that means more savings and deposits as far as we are concerned, and the general population in the area.

We are inclined to go for large towns. We look at the competition in the area. We look at the number of solicitors in the area, the marts, the concentration of the advisory services and how they are affecting the farming needs. The more development that is in agriculture the more that is going to be invested and possibly the more deposited. We also look at our own historical data—for example, how that particular area is covered according to the figures that we have from our computer. We look at the frequency of where our offices are because there is an old saying that a man would go to hell to get a loan but would not walk across the street to make a deposit. We also have to look at the psychological aspect. In opening an office in Bandon, there is a psychological urge to have another one opened in Fermoy as well. There is a demand for them. These are the factors that we look at.

46. Senator Cooney.—Are the banks still prepared to sell you their surplus premises?

Mr. Collins.—No. An interesting point you might consider asking us is: why did we open an office in Westmoreland Street? We had a very strong feeling that, as we were advertising widely on the television and in the national newspapers, there was a market there for us. In spite of public expression of a difference of interest between the farming and urban community, the results of opening that office in Westmoreland Street, which is solely a deposit-taking office, have been remarkable. It is the greatest encouragement to us that skilled and unskilled workers in that area of Dublin are consistent weekly and monthly depositors with the Agricultural Credit Corporation. It has been one of the very strong planks of our advertising that we got over in a subtle but effective way that a strong agriculture is a strong Ireland and that there is no conflict but, on the contrary, a complementary interest of both the urban and rural communities.

47. Deputy B. Desmond.—Could it not be argued that, in relation to the number of commercial banks and the proliferation of ACC offices, building society offices and so on, all this costs a great deal of money? I notice from the submission made to us that your staff at regional level has grown from 143 in 1977 to 213 in February, 1979. Admittedly you have got in substantial deposits as a result, but the question could be put: at what cost? The other question which follows would be: to what extent has your financial controller been able to control a now very substantially decentralised operation?

Mr. McCloskey.—The losses that arose were due primarily because of the foreign exchange losses. The policy of the corporation up to 1975 was to lend at fixed interest rates. In late 1974 the interest rates shot up to an exceptionally high level compared with the past and that gave rise to a situation where we had all our portfolio out at fixed interest rates and we were funding it at changing interest rates so we had to adjust our deposit rates. Immediately we took action and changed our policy. The policy became one of lending at variable rates. Since and during 1975 all our lending is at variable interest rates.

As regards the controls that must be implemented to control a decentralised organisation, that system must be quite different from a centralised system. We are quite happy that we have the machinery and expertise to control it. Our history as regards defalcations is second to none.

48. Deputy Fitzsimons.—It is good to hear that. The decentralisation is welcomed in rural areas and has been a success. However, one might think that financial control would be in jeopardy when one decentralises so much. What were the reasons for the recent management restructuring within your organisation? Was it because of decentralisation?

Mr. Collins.—The main reason for the management restructuring was, as I referred to earlier, that the growth of ACC from 1973 onwards was dramatic. As that happened and as money had to be got out to farming immediately prior to and after entry to the EEC, our staff was severely stretched. I, as chairman, and the board were genuinely concerned that we could get ourselves into a problem situation. We brought in consultants and discussed it with the Department of Finance. It was necessary to plan a different management structure for the ACC of the eighties. We have done that. We have implemented it but it is not yet a year in operation. It was vital to decentralise. It was a positive decision of the board and management. We could not service agriculture solely from head office with a few regional offices. It was also essential that controls be maintained. Men went in to the regional and area offices who, with Mr. McCloskey’s control and guidance, spent a sufficient time in head office to familiarise themselves with the procedures involved so that there would be the smoothest input of change from the operation being done in head office.

49. Chairman.—Does the new structure give more autonomy or less to local offices?

Mr. Culligan.—We have been pursuing, for many years now, a progressive policy of decentralising and giving more autonomy to local branches. The recent reorganisation has been a further stage in that development. We have, for some years past, had the country divided into five regions for managerial purposes with a regional manager in charge of each and a certain number of area managers and officers reporting to each regional manager who has a very large measure of managerial autonomy in respect of his region. He reports to a manager of operations who in turn reports to Mr. Hickey as assistant chief executive and, through me, to the board. There is a continuous chain of command there. We have, as part of our financial control procedures, an internal audit division which has been brought into being in the last three or four years in a formalised way and we are satisfied that there are adequate controls.

A very large part of ACC’s rapid development over the years has been due to a deliberate policy of giving as much autonomy as possible and as much discretionary authority in making loan decisions as possible to our local men. It has been possible, by virtue of progressive reorganisation of the company and progressive decentralisation, to increase the discretionary authority and the autonomy year by year. The amount of discretion and latitude available to our local people is probably well in excess of that available to local people in competing institutions. We derived a lot of our inspiration for that from the study of the United States system which we carried out in the sixties where this was a particularly strong feature. This continues to be the case. We are satisfied as a result of reorganising ACC five years ago and again in the last year, that we have kept pace with this progressive programme of decentralisation so far as managing the changes involved is concerned.

50. Deputy Fitzsimons.—How would you describe your working relations with the Department of Finance?

Mr. Culligan.—It is a good effective relationship which relates virtually exclusively to policy matters such as the Agricultural Credit Bill, which is being debated at the moment, our annual budget, interest rate policy and so on. Our capital budget for each year, as part of the public capital programme, is also agreed with the Department of Finance. It is only in matters of general policy that we find it necessary to consult closely with the Department. So far as matters arising from foreign loan requirements are concerned, we would consult with them with a view to securing the necessary Ministerial permission, guarantee and so on. We have a very good relationship with them. We do not have to go to the Department for funds. We have not had to go to the Department for funds directly since 1973 and that may be part of the explanation why the relationship is such a cordial one.

51. Senator Cooney.—One of the reasons, I take it, is because of the very good inflow of deposits?

Mr. Culligan.—Yes.

52. Senator Cooney.—Would you have any statistics as to how long the average deposit is left with you?

Mr. Culligan.—I cannot recall a precise statistic for that but I should stress that the bulk of our marketing campaign is towards the small depositor who tends to leave his deposit with us for years. Probably in 20 years’ time people will be able to look back and say that the average period of an ACC deposit was 20 years or something like that. I cannot give a precise figure as it has not been worked out but it is long term so far as the bulk of our deposits, which are small, are concerned.

Mr. McCloskey.—We have done an analysis of deposits and there is a direct correlation between the size of the deposit and the length of time that it stays in the corporation. That is the general trend in any savings institutions. In our case, as the chief executive has said, the smaller the deposit the longer it stays. The figures in ACC suggest that for deposits up to about £1,000 it stays, on average, about four years with us and gradually decreases from there on for bigger deposits.

53. Senator Cooney.—Could you tell us, or you might like to tell us privately afterwards, what proportion of your deposits would belong to non-residents?

Mr. Collins.—We will tell you that privately.

54. Deputy B. Desmond.—Could I ask you to comment, as far as you are in a position to do so, on the situation that, whereas you have effected a substantial reorganisation of your management structure, your board structure has not changed over the years? We met a number of State-sponsored bodies where worker participation has been introduced of late. It could be argued—no reflection whatever on your chairman who has substantial experience of financial affairs and so on—that there is not, as of now, in the official sense a person of financial/banking background on the board of ACC. I say that with no disrespect to the farming community. There are four farmers and a farmer/victualler on the board. With no disrespect to the gentlemen concerned, is it not time that the board of ACC was restructured and broadened if you are to aspire to being a banking enterprise in due course?

Mr. Collins.—I am very glad Deputy Desmond raised this question. We as a board accept unreservedly the prerogative of the Minister to make appointments to the board. On behalf of the board, I made representations to the Minister. For the very reasons the Deputy mentioned, I believe very strongly the board needs strengthening. I am convinced of this especially since we are now an independent currency. I very strongly feel we need, in the ambit of the seven directors, a director with a particular strength in financial knowledge and financial disciplines if we are to aspire, as we do, to becoming ultimately a full bank. This input of expertise is vital.

On our board there is a tremendous need for a man with very proven marketing expertise in all ACC activities. There is also a need on the board for a very strong proven farmer, a farmer who has developed his own enterprise, who is acknowledged publicly as a man who has caused things to happen, who also publicly is not seen to be an axe-grinder, a hobbyhorse man, a complainer or a begrudger. In other words, a person who would be acceptable to the farmer in the street, and the man from the street. We as a board were not selected for our worker involvement. As a board, we would not be negative about this; we would be positive. More and more I am convinced that all enterprises are about people, to the extent that people are communicated with by a right, rather than having to command it, that problems are explained before they happen and that the meeting of management and workers is not in a confrontation situation. I would welcome this happening although there are dangers in its being rushed. There are problems to be overcome, but they will be solved with time.

I have had the experience of sitting on four semi-State boards. I believe that, within the ambit of appointment by a Minister, there is within the range of people from whom he would select—for whatever reason he picks them—sufficient skills and expertise that are vital to an organisation such as ours. We need this type of input onto our board. I believe we should not prop up any farming or agri-business enterprise indefinitely; equally we should not be propped up. Through the twenties, thirties and forties, when the corporation was ticking over, there was no expectation at Government or ministerial level that we would make a profit, and if we made a small profit we were criticised. Those days are gone. The corporation now face a great deal of competition.

It is important also that within a board there is a certain continuity. The facts of life in many semi-State boards are that a board will change with a change of Government. Where there is an overlap, the occupants wait until the exact date their span of occupation terminates. Our board and other boards suffer because of this lack of continuity. I personally believe implicitly that the Minister understands this need now more than ever before. Unreservedly, we accept it is the prerogative of the Minister to make those appointments. State boards have a vital part to play and, in general, they have been successful.

We need also to give management confidence in the board, a feeling that problems can be discussed and that the difficulties will be understood. This is all the more essential in our case because we are a part-time board, and the chairman is a part-time chairman. I believe a company is run more effectively with a part-time chairman. There is, and should be, very strong liaison between the chief executive and the chairman. The management through the chief executive have a definite, worthwhile, invaluable, input to give in the formulation of policy and it is the responsibility of the board to formulate policy. It is the responsibility of the management to carry out that policy.

I also feel very strongly that, in the event of an organisation not being successful, the tenure of office of the board should be looked at quickly. These are the disciplines. These are the rules of the game in which we compete. Governments of the day must give this matter very genuine consideration. I know the difficulties experienced by Ministers in this regard, because I discussed them with different Ministers. For instance, there are pressures to reward supporters with positions and that can be done but, in doing that, we must ensure that the ingredients vital to a board like ours are provided from the disciplines I outlined. In regard to our own board, this is a matter of urgency.

55. Deputy B. Desmond.—Is it not arguable that one method of strengthening the continuity within the board and the general authority of the organisation might be to have the chief executive of the organisation, as happens in other bodies, a member of the board?

Mr. Collins.—Yes. I believe it strengthens the relationship of the chief executive with his colleagues in top management when he has the strength of being a board member, but it also clearly defines where his responsibilities as a board member end and his authority, responsibility and accountability as chief executive begins. This is especially true where there is a part-time chairman.

56. Senator Cooney.—Apart from the question of the composition of the board, some of the other bodies before us indicated difficulties they were experiencing in terms of holding staff because of public service pay constraints which also apply to you. This caused difficulties for them in holding and getting staff. Would you like to comment on those problems in relation to the ACC?

Mr. Collins.—I will comment on them.

57. Senator Cooney.—Is there any difficulty?

Mr. Collins.—No, there is no difficulty in commenting. I am not referring to our friends in the press. There has been enough exposure of the position of our chief executive in recent years. The Minister has helped us in an interim hearing. I want to make this as a calm but very strongly felt input. The strictures imposed on the salaries and total remuneration we can pay to the type of management essential to run an organisation like this are really restrictive and damaging. I speak from experience on four semi-State boards every one of which, during my time as a director, have lost excellent men or have retained men for the wrong reasons—their dedication and commitment to their organisation. I know of no other semi-State body with a greater commitment than the management of the Agricultural Credit Corporation. The compression which we are forced to execute on our top salaries is a very serious deterrent. I am very seriously saying that it undoubtedly affects morale.

At present we are endeavouring to recruit a very senior man to our organisation. We are unable to make our first choice. We are in competition in the commercial world and this man currently has a salary greatly in excess of our chief executive so we do not employ him. We look at the second applicant for the post and hopefully he is in a salary range that we can employ him. I accept that there must be a holding of the ring because inevitably in certain cases boards can abuse their position with regard to their staff or a position can develop where the value placed by senior executives on their contribution can be over-stressed.

Semi-State boards are charged by a Minister with the responsibility of running an organisation and, by any standards, I feel we have responded enthusiastically and aggressively to that responsibility, but it has been extremely difficult in the recent past to recruit staff. As a result of this compression we have lost staff. You will agree that it is the good men with initiative and belief in themselves who will go. You will then have the man with the full-back mentality who will stay; the forward mentality will go out and create the opportunities. I do not want to elaborate on this any more beyond saying it is a very serious problem.

58. Senator Cooney.—You have a problem?

Mr. Collins.—A very serious problem.

59. Chairman.—To go back to when we discussed your relationship with the Department of Finance, is it correct to say that from time to time when you seek approval of changing interest rates the delay in giving approval has caused you certain difficulties?

Mr. Collins.—Yes, it has caused us difficulties. We have been able to quantify and submit to the Department the shortfalls in revenue as a result of this. I have, in the excellent relationship I have with the Minister, strongly and respectfully expressed what this means to the corporation. I feel that in the competitive and commercial world where we have to operate, it is terribly important that we get a decision. We do not look for an adjustment in interest rates without a comprehensive submission strongly backed up by a totality of information to sustain the need. The delay in the increase forthcoming can and has resulted in us having to raise our interest rates by a percentage higher in some cases than otherwise we would have to. It can be frustrating for a management and board to work under these circumstances.

60. Chairman.—Do your normally get the figure you want in the end? Is it a matter of delay rather than refusal to agree to your recommendations?

Mr. Collins.—We usually get the increase in the end but it can be even a greater increase than we originally looked for because of the delay.

61. Chairman.—It can be greater in the end?

Mr. Collins.—Depending on the length of the delay.

Mr. Culligan.—Where a delay of that type takes place it would take place not because of any dilatoriness on the part of the Department as such but due perhaps to matters of wider Governmental policy which make it desirable in the Government’s eyes to impose the delay.

62. Chairman.—You mentioned in your submission that you give preferential loans. You stated that loans are available at a preferential rate of interest to smallholders who require finance for general productive purposes. Would this be regarded as a social obligation in that you feel that you should do this because of the part you play in the agricultural community or is it regarded as part of your ordinary marketing operations?

Mr. McCloskey.—The level of preference in terms of interest rates is relatively small. In terms of our total lending it is insignificant but it applies to small farmers. We give interest rates there which are about 1 per cent below that obtaining for farming rates generally.

63. Chairman.—It is not significant in your overall activities?

Mr. McCloskey.—No.

64. Chairman.—As regards your overall borrowing at the moment, approximately what percentage of that would come from abroad, which I suppose would be the European Investment Bank?

Mr. McCloskey.—As it stands at the moment our foreign borrowings amount to the equivalent of IR£23 million and our balance sheet is in excess of £300 million.

65. Deputy B. Desmond.—There is a Government guarantee on the deposits and they enjoy the status of trustee securities and so on. Have you ever done an exercise to try to quantify the value of the Government guarantee?

Mr. Collins.—Yes. We have carried out extensive marketing surveys. The Government guarantee is unreservedly considered to be one of the principal factors which enabled us to motor ahead on deposits.

66. Deputy B. Desmond.—In recent legislation a State-sponsored body, the IIRS, have been permitted to seek loans, and so on, but they have not been guaranteed. You would not particularly welcome a trend of that nature?

Mr. Collins.—The IIRS is a different operation.

Mr. Culligan.—Our marketing research has demonstrated that the factor which most determines the decision of a small investor to invest in a particular institution is security, and the security afforded by a State guarantee, particularly having regard to the financial condition of the corporation, is immense and very necessary.

67. Deputy Fitzsimons.—You have not paid a dividend to the Minister for Finance for some years. Could you let us know when you might be in a position to remunerate the State’s investment to any appropriate extent?

Mr. Collins.—I have discussed this matter with the Minister, as I outlined earlier. We will not be having any input of equity capital. The only way we can build up our free resources ratio and help to strengthen our balance sheets is by our retained profits.

As chairman, I always discuss the accounts with the Minister in advance of their going to the Department. In discussing the accounts for 1978 with him I successfully pre-empted any comment from him in his report on the accounts on the fact that we did not pay him a dividend. I explained the position to him. I told him about the improvement in our profits and the necessity to retain these profits for a number of years. The last time I met him he said he was glad to hear from one of his colleagues that in the speech made at the opening of an office I indicated we would, and should, be in a position to remunerate the State’s capital adequately by 1982. He was very helpful in his understanding of the need to build up and strengthen our balance sheet.

Deputy Fitzsimons.—The year 1982 will be a very formidable year!

68. Senator Cooney.—What is your profitability target?

Mr. Collins.—We have a target but I will submit that to you in writing.

69. Deputy B. Desmond.—I presume some farmers are still enjoying fixed interest loans. In 1975 they accounted for about £100 million of the total outstanding. Can you give us a figure as to how much is outstanding at the moment?

Mr. McCloskey.—The level of fixed interest rate loans is a relatively small proportion of our total lendings at the moment, and it might be in our interest if we indicated to you in writing what that figure is.

Mr. Collins.—It has been substantially reduced, but there are still some farmers who will die with it; they will not give an inch on it. It was easy to lend at fixed interest rates as recently as five or six years ago, but it is not now. We have not met any difficulties where we are lending again to farmers who have had fixed rates. There were certain criticisms made, but it was generally accepted as being necessary and we weathered any short-term criticisms because we had to do it.

70. Deputy B. Desmond.—One of the criticisms made in relation to foreign exchange losses was that the particular policy of borrowing was not necessarily endorsed by the Central Bank at that time and it was inferred, I think—I cannot get the source at the moment—that it may have been contrary to the advice of the Central Bank. Can you comment on that?

Mr. Collins.—The facts are that we got full approval to do that. We did not engage in foreign borrowings without their full approval. There were needs for the State at the time to avail of less risky borrowings. Therefore, we had to take the decision. It was vital that, from whatever source it came and with all that foreign borrowings implied, it be carried out. The results in the assets and the exports from this country dramatically exceed the exchange loss which we have now absorbed. It is important to emphasise that our approach to the commercial life was such that we went and really told the then Minister we felt it imperative that as the financial institution which was actively engaged with other continental financial institutions, it would be wrong if we did not state on the face of our balance sheet what our losses were. We did this and I think we gained considerable respect for doing it. They are gone now.

Mr. McCloskey.—At the time there were press reports that the Central Bank was against it. The Central Bank at that time gave written consent to the foreign moneys we borrowed.

Deputy B. Desmond.—I wanted to clarify that.

Mr. Hickey.—There was a definite void in the credit requirements at that time and it had to be filled. As our chairman said, I think the effects on the economy where it was pumped in are noticeable.

71. Chairman.—To get back to the fixed interest rates, I understood you to say you did not give any fixed interest loans now?

Mr. McCloskey.—Let us clarify the position. We give fixed interest rate loans because of our hire purchase and personal loan operations and that is at fixed interest rate lending and tends to be short-term— an average of three years—and the rates are such as to take account of any fluctuations in our cost of funds. As regards lendings to farmers generally, that is at variable interest rates. As regards funds coming from the EIB, which we on-lend to agri-business customers, that is at fixed interest rates. The exchange risk is guaranteed by the Government.

Mr. Collins.—We operate on a predetermined agreed mark-up between us and the European Investment Bank.

72. Deputy B. Desmond.—During the past 18 months you had some industrial relations difficulties. My understanding from talking to people in the trade union movement is that these difficulties could have been quite serious. Are they now over and done with or is that a fair question?

Mr. Collins.—I would not answer that they are over and done with. This was a demarcation dispute. It was an understandable difficulty; there was decentralisation involved and certain resistance led to a stoppage. I believe the settlement of that stoppage has brought a very genuine sense of realism to both sides. It is always easy in hindsight to say it could have been avoided. As far as we are concerned every effort we could make to avoid it was made and I believe sincerely that the union representatives would say the same. I think both sides are mature enough to have learned from what happened. Relationships are very much better and there was a calm realisation that the jobs that the union were arguing about and the aspirations they had were being put at risk. The ultimate settlement of the strike was without acrimony. Things have settled down since then.

Mr. Culligan.—During the course of our industrial difficulties we succeeded in maintaining a service to the public in all our offices with the exception of our Westmoreland Street office. We transacted nearly as much business as in the same period last year which was quite an exceptional performance on the part of a financial institution affected by industrial relations problems.

73. Deputy Fitzsimons.—Your deposits are guaranteed by the State and entitled to the status of trustee security. What estimate do you put on the value of that guarantee and is it justified that you should have that guarantee?

Mr. Collins.—Not alone justified but vital. That has been the major ingredient in the dramatic and sustained rise in our deposits. Putting that against certain disadvantages we have, which Deputy Desmond referred to when asking me a question, we believe that it is a very fair balance and it is vital and essential.

74. Chairman.—Would you like to have it the other way around—no guarantee but the advantages——

Mr. Collins.—No.

75. Chairman.—You would rather have it the way it is?

Mr. Collins.—Yes, but with the plus that Deputy Desmond suggested might be to our benefit.

76. Senator Cooney.—There would be no non-resident money without it?

Mr. Collins.—No.

77. Senator Cooney.—As regards your future capital structure you mentioned in your submission a liquidity ratio target of 20 per cent. How did you arrive at that figure? Will it be a constraint on lending in time to come?

Mr. McCloskey.—It was introduced primarily because we want to act as a responsible financial institution. The factors that were taken into account in arriving at that decision were that the Central Bank, who control the licensed banking system, had at that time a minimum requirement of 20 per cent liquidity ratio and it varied from 20 to 23 for non-associated and 43 per cent for the associated banks. When we were taking that figure into account we had to recognise that the ACC was becoming a bigger financial institution. It was getting an increasing share of the deposit market. In terms of the structure or solvency of our balance sheet we have, as a deliberate policy, lent a lot of money long-term. Therefore, the flow of funds back into the corporation is somewhat slower with long-term lending than it is with short-term lending. In a situation where we are not able to compete with deposits or deposits are moving to other financial institutions, we want to have the ability through these reserves to meet that requirement. Those are the factors that have been taken into account. Twenty per cent is adequate. It will have to be reviewed from time to time as all our policies are. We feel that it is adequate at present.

78. Senator Cooney.—Would you have any hesitation in reviewing it if you found you were squeezed for funds for lending?

Mr. McCloskey.—In that situation one has to strike a balance between meeting the needs of farmers and being prudent in banking. One would strike that balance when the circumstances arise.

Mr. Culligan.—The Department of Finance is quite firmly of opinion, and we would not be in disagreement with it, that we must strive to attain that target over the time period that we have indicated irrespective of occasional ups and downs in the credit situation.

79. Chairman.—What rate of growth in lending do you envisage over the next five years?

Mr. Collins.—We will answer that in writing.

80. Chairman.—You mentioned that your gross operating margin is around 4 per cent. That seems to be a bit big. If you eliminated fixed interest loans would that margin come down?

Mr. McCloskey.—No. The 4 per cent margin is an average one which the corporation feel is necessary if we are to strengthen our balance sheet. In arriving at that we are taking into account the amount of money that we have out at fixed interest rates. Having regard to the rate of return we set ourselves that is the margin that is necessary to produce the desired rate of return on capital to produce the solvency ratio that we have set ourselves. They are interlinked. You cannot have one without the other.

81. Chairman.—Is it a bit big compared to a merchant bank?

Mr. Culligan.—It is a narrower margin than that obtained by our competitors on the basis of information available to us.

Mr. Collins.—A very important ingredient to attain that 4 per cent margin will be the competitiveness of our smaller deposits in the £50 to £15,000 bracket. We would be very concerned with any erosion of that.

82. Senator Cooney.—You base your profitability forecast on that margin?

Mr. McCloskey.—Yes. As regards the merchant banks it must be remembered that by and large they tend to deal in large sums of money. They are really wholesalers and wholesale banking tends to have a smaller margin than would normally be available in retail banking because the administrative structure is quite different and that gives rise to different margins.

Chairman.—That is true.

The witnesses withdrew.

*See Appendix 2.