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APPENDIX 2MEMORANDUM FROM THE AGRICULTURAL CREDIT CORPORATION, LIMITED1 DEVELOPMENT OF THE CORPORATIONThe Agricultural Credit Corporation Limited was established under the Agricultural Credit Act, 1927 for the purposes of supplying farming co-operatives and individual farmers with long-term and medium-term loans, so as to ensure that the development of agriculture would not be hampered by lack of reasonable credit facilities. For the first thirty years of its existence the growth in the Corporation’s business was on a modest scale. The total assets in the Balance Sheet at 30th April, 1961 amounted to £3,723,791. Annual lendings at that time were of the order of £800,000. This level of operations at the time reflected the cautious lending policy of the Corporation which in turn was to some extent due to the statutory limitations on its lending powers. The Agricultural Credit Act, 1961 was enacted to enable the Corporation to provide an improved credit service for Irish agricultural development. The authorised share capital of the Corporation was increased from £300,000 to £2 million and the borrowing limit from £8.3 million to £10 million. The Act simplified the Corporation’s procedure for taking land as security for loans and permitted the Corporation to engage in hire purchase business. The Act empowered the Corporation to issue stock or shares to persons other than the Minister for Finance but the Minister’s consent was necessary so long as he held not less than half the issued share capital. The Minister for Agriculture and Fisheries, with the consent of the Minister for Finance, was authorised to guarantee the Corporation against losses on loans and other credit facilities which it provided, the total of the guarantees outstanding at any one time not to exceed £5 million. This provision was intended to facilitate the supply of credit by the Corporation in cases in which the security available might not be considered adequate but where it was felt assistance should be given in the interest of agricultural production. The Act also extended the powers of the Corporation to enable it to promote companies or to take shares in them, with the object of furthering useful agricultural developments. While the 1961 Act enabled the Corporation to expand the level and scope of its lending activities, it was the 1965 Agricultural Credit Act which empowered the Corporation to take deposits from the public, thereby giving it access to the deposits and savings market which is a necessary pre-condition to the growth of a modern financial institution. The dependence of the Corporation on the Exchequer as a source of funds to finance its activities gradually declined with the introduction of a deposit scheme by the Corporation in the mid-1960’s. In point of fact, the last time the Corporation had recourse to the Exchequer was in 1973 at the beginning of the last recession. With more flexible lending facilities and access to the deposits market, the Corporation set about structuring itself in a manner which ensured that agricultural output would not be hampered because of the lack of suitable and adequate credit. Agricultural Science graduates were employed in order to provide a closer link between the Corporation and the farmer, while at the same time educating the farmer in the use of credit. In the mid-1960’s it was decided to open offices in the provincial areas; this policy has continued to the present day and the Corporation has now approximately 50 offices throughout the country. The growth in the branch network and the employment of Agricultural Science graduates resulted in a rapid expansion of the Corporation’s activities. By 30th April, 1965 total assets had grown to £11.8 million, compared with £3.7 million at April 1961. By April 1970 total assets had reached £25.5 million. The agricultural industry was developing rapidly in anticipation of our entry in the European Economic Community. The outstanding feature of the 1970’s, as far as the Corporation is concerned, is the rapid growth in the level of activities. This rapid growth is reflected in the significant increase in lendings. Between April 1970 and December 1978 the total advances outstanding had increased from approximately £25 million to £291 million. The following two Tables set out the number and value of loans made in each of the years from 1974/75 to 31st December, 1978. The principal purposes for which this money was advanced are also shown. The growing importance of the Agricultural Credit Corporation as a financial institution in the Irish economy prompted the Board, on the initiative of Management, to re-examine the whole question of the basic goals and objectives of the Corporation. LENDINGS
2 CURRENT OBJECTIVESWhen the Agricultural Credit Act of 1927 was enacted farming circumstances were significantly different from those obtaining today. Farmers found it difficult to obtain suitable credit, particularly long-term funds; hence the setting up of the Corporation to deal with this problem. When the Corporation was established under the 1927 Act it was the general understanding at that time that its operations were to be run along commercial lines. However, neither the Act of 1927 nor any subsequent legislation ever really defined the commercial objective. It is understandable, therefore, that in its early days of development the prime emphasis was placed on providing suitable finance for farmers; it is fair to say that remunerating adequately the Government’s equity stake in the Corporation was not seen in the same light. As the circumstances and opportunities for Irish farming changed a different emphasis was placed on the Corporation’s objectives. During the late 1960’s and early 1970’s the level of demand for credit expanded very rapidly. The Board of the Corporation at that time felt that the Corporation should be the prime source of finance for Irish agriculture, this objective being in the best interest of farming in particular and the economy generally. When the country entered the European Economic Community the demands on the Corporation for finance were much greater than anything experienced earlier; although there was an excellent growth in deposits the level of demand was much greater than the Corporation could finance from domestic resources. In the absence of long-term finance at reasonable interest rates from domestic resources the Board of the Corporation decided to seek funds from abroad. Accordingly, in 1974 two medium to long term loans, equivalent to approximately £10 million, were arranged. At the time of drawdown it was recognised that the Corporation was exposing itself to an exchange risk, a risk which in the event turned out to be much greater than could have been foreseen at the time. The losses experienced on these and other foreign currency transactions undermined the Corporation’s equity base at a time when the level of advances to Irish agriculture was still growing rapidly. A feature of the very satisfactory growth in domestic deposits, which rose from just over £50 million in 1974 to almost £180 million at December 1977 was that they were all short term funds which were used to finance agriculture for periods ranging from one to twenty five years. By 1977 it had become apparent for some time that the Corporation could not continue with its current policy of borrowing short and lending long. It was not just borrowing short and lending long, it was a question of lending all resources. The Corporation was in a very vulnerable situation. Furthermore, while strenuous efforts were being made to improve the level of profitability, it was still a long way short of the level necessary to remunerate adequately the Government’s stake in the Corporation, after making good the losses arising from foreign borrowings in early 1974. The Board and Management felt that the Corporation was carrying undue risks because of its size and the absence of a policy on liquidity. What would happen if there was a severe run on the Corporation’s deposits? It could only turn to the Exchequer and this could happen at a time when the Exchequer was least able to cope. This situation was not in the long-term interests of either the Corporation or its customers. Because of the absence of any explicit statutory goals, the Board in 1977 invited an independent firm of management consultants to assist the Corporation in defining its basic goals. After much detailed discussion and analysis of the problems, the Board adopted the following as the objectives of the Corporation:— To provide banking and financial services to Irish agriculture, fisheries and related industries in order to promote and facilitate their development, including the provision of finance for projects which in the opinion of the Corporation will be financially viable and will increase or contribute to increasing agricultural or fishery output, and to do this while— (a) achieving and preserving financial strength and independence, and (b) earning a return on capital employed which is realistic in terms of the Corporation’s long-term commitments and trends within the financial sector. The Corporation is currently pursuing policies which will ensure that the objectives as set out above will be met in full not later than 1985. 3 FINANCIAL PERFORMANCEThe Profit & Loss Accounts and Balance Sheets set out below reflect the financial record of the Corporation during the past five years. The main feature during the period in question has been the significant growth in resources which have been in the main deployed in loans and advances to agriculture. While the foreign exchange losses affected the level of profits, particularly in the two years after the loans were drawn down, there has been an improving trend in the level of profitability since 1976. In the light of the objectives which have been set and the policies being pursued to achieve these objectives, the Corporation is confident that adequate profits will be earned in the future, despite the short-term difficulties being experienced in the current year. It must be remembered that prior to our entry into the European Economic Community the level of family farm income was low in absolute terms. This is reflected in the fact that farmers were exempt from income tax. As already indicated, the Board of the Corporation saw themselves as providing suitable finance for farmers in order to develop and increase their output. Prior to 1975 all lendings were at fixed interest rates and very little advances were made where the rate of interest exceeded 10%. Up to the early 1970’s the Corporation had financed a large amount of loans from funds at fixed interest rates. However, during the late 1960’s and early 1970’s the Corporation was becoming more successful in the deposits market and the rates on these funds were in line with the market. In 1973 and 1974, when interest rates took a sudden and sharp increase, the Corporation’s profit margins were immediately squeezed. Accordingly, from 1975 onwards all lending by the Corporation, other than hire purchase, was at variable interest rates. The amount of fixed interest rate loans which stood at £100 million in 1975 is a significant factor, though a diminishing one, in the level of profit margin that the Corporation earns on its resources. Much of the money which was outstanding at April 1975 has now been repaid, with the result that fixed interest lending in our loan book is a relatively small proportion of the total. While lending at fixed interest rates has affected the Corporation’s margins, it was the exchange losses incurred on the foreign borrowings which caused the significant deterioration in the level of profits. However, in the last three years the Corporation has improved its position and the net profit before tax for the year ended 31st December, 1978 amounted to approximately £3.8 million. Nevertheless, it will be some time before all the losses are fully recovered and, therefore, some time before the Corporation is in a position to remunerate adequately the Government’s stake in the Corporation. The growth in deposit resources has been very satisfactory and is now the main way by which the Corporation finances its activities. In 1975 deposits represented 59% of the total resources. At December 1978 this figure had increased to 81%. The Corporation continues to attach great importance to the deposits market and this is reflected in the fact that its share of the market continues to rise. THE AGRICULTURAL CREDIT CORPORATION, LIMITED GROUP BALANCE SHEET (in £’000’s)
THE AGRICULTURAL CREDIT CORPORATION, LIMITED GROUP PROFIT AND LOSS ACCOUNT (in £’000)
4 BANKING SERVICESThe Agricultural Credit Corporation make available to farmers a range of loan and instalment credit facilities. An outline of the most significant schemes at the present time is given in the following paragraphs. Farm Development LoansTerm Loans to finance the planned expansion of farm enterprises are available under the Corporation’s Farm Development Loan Scheme. These loans can be applied to a wide variety of productive purposes, including: * The construction of housing for livestock. * Land reclamation, drainage and fencing. * The purchase of livestock and fertilisers. * The provision of working capital. Repayments are made over a period of up to 16 years, depending on the purpose of the loan. To apply for a Development Loan a farmer draws up a simple plan, usually with the help of his Agricultural Advisor. This plan shows the uses to which the money would be put and the expected return. The Corporation’s local officers provide every assistance and the facility is available to all farmers, irrespective of their classification under the Farm Modernisation Scheme. Development Loans carry a number of special concessions. (i) Loan holders need not make any repayment of Principal or Interest during the first year. (ii) Loan holders also have the option to defer repayment of Loan Principal during the following one or two years. These provisions are designed to allow a “breathing space”. They are particularly useful where projects do not provide an immediate return on investment. (iii) If a loan holder meets with unexpected circumstances at some later time, he may postpone the repayment of Principal for one further period of twelve months. Ordinary Term LoansThe Corporation also provides medium to long term loans for farming projects which do not qualify under the Development Loan Scheme. The uses to which these loans can be put are as varied as the business of agriculture itself. Examples include:
The first repayment of principal due on these loans is not required until the due date following the first anniversary of the date of issue. Seasonal LoansThese are short-term loans to finance farm expenditure of a seasonal nature. They cater for a wide range of requirements, including fertilisers, seeds, feeding stuffs, fuel, wages, working capital and the purchase of sheep, pigs and store cattle. Seasonal loans are especially suitable for farmers who have been availing of merchant or co-op. credit, or who require extra capital for short periods not exceeding one year. They are usually repayable within twelve months, although a period of up to 15 months may be agreed if warranted by the particular circumstances. A Seasonal Loan may be drawn all at once, or in stages. In the latter case, if requested, the Corporation sends the farmer a series of cheques, dated to suit his requirements. Alternatively, he may request that the cheques be sent directly to the Merchant or Co-op. with whom he is dealing. Repayment dates are also fixed to suit the borrower’s convenience. These would normally coincide with the dates on which he expects to receive income from projects financed by the loan or from other sources. Apart from their flexibility, Seasonal Loans have the attraction of being made available quickly. Formalities and form filling are kept to a minimum. Once an application has been accepted the cheques can usually be issued within a few days. The Macra na Feirme Projects Loans SchemeLoans at preferential interest rates are available to members of Macra na Feirme, aged between 17 and 30, who have completed the 100-hour basic EEC course and who are planning or are actively engaged on a farm project. The borrower must submit annual accounts certified by his advisor. After the initial loan has been outstanding for at least three years, a borrower may apply for a further loan. Loans for Small HoldersLoans are available at a preferential rate of interest to small holders who require finance for general productive purposes. Voluntary Early RedemptionIf a borrower decides to clear a loan before its expiry date he is welcome to do so and there is no penalty. The sum payable is the outstanding principal, plus the interest due on the date of settlement. A borrower may also clear part of a loan at any time. The amount of interest payable will be reduced accordingly from the day the part payment is made. Interest RatesLoans are issued at the interest rates ruling on the date of issue. Interest rates fall and rise in sympathy with the cost of funds to the Corporation and the rates fixed are competitive with general interest rates ruling in the market. All loans (with the exception of those issued prior to 1975 at a fixed rate of interest) are liable to interest rate variations from time to time. Repayment of Loan PrincipalTerm loans are repayable by scaled instalments of principal using the Annuity method. Security for LoansIn general, the security which customers are asked to provide depends on the amount and term of a loan. The usual form of security for loans which have a term of more than five years is a Land Mortgage, i.e. a First or Second Charge on Title Deeds. Mortgages on Life Policies and Stock Exchange securities may also be acceptable. Where land is the sole security, finance for up to two-thirds of its market value may be considered. A Personal Covenant, i.e. a written promise to pay, may be acceptable for Seasonal Loans not exceeding £10,000 and for loans of up to £2,000 which have a term of five years or less. In other cases, a Personal Guarantee by a suitable Third Party or a Chattel Mortgage may be considered. Loans advanced under the Macra na Feirme Scheme should be backed by a Personal Covenant and if the Borrower is under 21 years of age, by a Guarantee signed by a parent or guardian. Instalment CreditThe Corporation offers instalment credit in the form of Hire Purchase and Personal Loans for agricultural machinery and equipment. Hire PurchaseFacilities are provided for the purchase of new combines, trailers, ploughs, forage harvesters, balers, fertiliser spreaders, etc. and new and used tractors. The minimum down payment is 20% of the retail price (or 25% in the case of used tractors). Instalments in equal amounts are payable over a period of up to five years; the most usual period being three years. To suit the convenience of customers, payments may be fixed on a monthly, quarterly or half-yearly basis. Harvest or special payment schedules are also available, where appropriate. Credit charges are calculated by applying a flat rate of interest, extended pro rata for the period of the agreement, to the amount outstanding after the initial instalment, (i.e. the Deposit) has been paid. Personal LoansFinance is also available by way of Personal Loans for the purchase of new or used machinery, bulk milk tanks, haybarns and leantos. The maximum amount advanced is 80% of the cost of new machinery and 75% of the cost of used machinery and haybarns. Bulk milk tanks qualify for a 100% loan. Repayments may be made monthly, quarterly or half-yearly over a period of three years. Harvest time payment arrangements are also available in suitable cases. Farmers who have (or are about to obtain) other loans from the Corporation may also obtain personal loan facilities for up to 75% of the cost of new cars, or used cars which are less than three years old. Agri-BusinessThe Corporation provides a package of short, medium and long term loans to merchants and co-operatives engaged in food processing and ancillary services. With a view to promoting employment, special medium to long term funds are made available from the European Investment Bank through the Corporation for financing projects in: (a) food processing (b) intensive pig and poultry rearing and fattening (c) intensive glasshouse products and mushroom cultivation. Any exchange losses associated with these borrowings are borne by the Exchequer. DepositsThe Corporation provides a saving scheme for investors similar to that offered by the major banking groups in Ireland. These deposits are guaranteed as to principal and interest by the Minister for Finance. However, the Corporation’s depositors do not enjoy the benefit of tax relief on the first £70 (£140 in the case of a married couple) of interest earned. This relief is granted to certain banks named in section 344 of the Income Tax Act, 1967. Branch NetworkAll the foregoing services are provided through our branch network as set out on page 114. 5 PERSONNELBetween the date of its incorporation in 1927 and 1961 employment numbers in the Corporation never exceeded 45 because of the low level of its operations. In 1959 the Irish Government requested Mr. F. W. Gilmore, the then Deputy Governor of the U.S. Farm Credit Administration, to undertake an appraisal of the credit facilities available to farmers in Ireland. As a result of this survey, the Agricultural Credit Act 1961 was enacted. As already indicated, this Act allowed a considerable expansion in the Corporation’s lending activities and allowed the Corporation to become involved in hire purchase. Gilmore also recommended that the Corporation should consider the appointment of local officials who would contribute to the business process by adding a knowledge of local affairs. Consequently, the first Agriculture Officer was appointed in 1961 and subsequently a small number of local credit agents were appointed in 1963. By this time the Corporation’s staff had increased to 61. During 1965/66, as a result of a senior management study of the U.S. credit system, the Corporation commenced a programme of opening Area Offices throughout Ireland and appointing agricultural science graduates to take charge of these offices. This process led to a situation whereby in 1971 the total staff of the Corporation was 164, of whom 30 were located in local offices. BRANCH NETWORK
In 1972 the Board commissioned an independent firm of management consultants to examine the organisation structure. Their recommendations allowed for the organisation of our operations into five regions throughout the country and the devolution of many administrative functions from Head Office to these Local and Regional Offices. Thus began the Corporation’s decentralisation programme. As a back-up to this programme the consultants also recommended that the Corporation should introduce a full computer facility within the organisation in addition to enhancing its finance and accounting expertise to a level commensurate with the increase in borrowing and lending being dealt with at that time. By 1977 the staff of the Corporation had increased to 479, of whom 143 were located in our Regional and Area Offices throughout the country. In addition to examining the basic goals of the Corporation in 1977, the Board, with the assistance of consultants, examined the structure most appropriate to the achievement of these basic goals. It was decided to structure the organisation into three main groups, incorporating nine different functions, as follows:— * Planning and Control— Corporate Planning Department Finance Department * Operational— Operations Department Banking Administration Department Credit Quality Control Department * Advisory— Law Agent Personnel Department Secretary Public Relations This organisational structure, which is set out on page 116, has been in operation since September 1978. The Corporation’s policy to decentralise our operations on a planned basis will continue to be pursued with a consequential devolution of managerial authority to local level. By February 1979 the staff had increased to 606, of whom 213 were located in 43 local and regional offices throughout the country, with an increasing number of offices in urban areas specifically for the purpose of supplementing the Corporation’s traditional deposit base. The figure of 606 includes a total of 60 agricultural science graduates and 30 other professionally qualified personnel, e.g. accountants, economists, etc. Our computer programme continues to give us the use of the most modern management and communication techniques to facilitate our continued growth. Naturally, under circumstances of such change, the area of industrial relations has not been without its problems. Up until 1978 the ATGWU was the only Union with representation rights within the Corporation. Since then, however, the Irish Transport and General Workers’ Union, The Association of Scientific Technical & Managerial Staffs and The Incorporated Law Society have received negotiation recognition. Consequently, the Corporation is unionised up to senior management level (the level below Divisional Head shown on page 116).The industrial relations problems will, of course, present a growing challenge to management in years ahead. The Board of the CorporationThe Board of the Corporation is appointed in accordance with the Agricultural Credit Act 1978. The number of Directors may not be greater than seven or less than three. Normally there are seven Directors. Appointment arises either through direct nomination by the Minister for Finance or election at a General Meeting. In the latter instance, election results from a Ministerial directive. Traditionally, our Directors have been people drawn from the farming community or from agricultural-based industries and are typically from a rural background. THE AGRICULTURAL CREDIT CORPORATION LIMITED TOP LEVEL ORGANISATION STRUCTURE
6 FIVE-YEAR FINANCIAL PLANS*8th October, 1979. |
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