Committee Reports > List of Committees > Joint > 1980 > Committee on Commercial State-Sponsored Bodies > Report No. 10 - Agricultural Credit Corporation, Limited

THE AGRICULTURAL CREDIT CORPORATION, LIMITED

CONTENTS OF THE REPORT

TENTH REPORT

THE AGRICULTURAL CREDIT CORPORATION, LIMITED

I INTRODUCTION

(a) Background

1. The Agricultural Credit Corporation, Limited (or the ACC as it is known) was one of the first State-sponsored bodies established in this country. It was set up in 1927 to provide a specialised credit service to agriculture, especially in the area of medium-term and long-term loans to farmers and farming co-operatives. For many years the volume of business remained small, reflecting the difficult economic environment for agriculture in those years and farmers’ reluctance to borrow. By 1961 total assets had reached £3.7 million in the balance sheet and annual lendings were of the order of £0.8 million.

2. The ACC’s activities grew more rapidly in the late 1960s. The ACC began to promote itself as a lending agency while, amongst farmers, there was a greater willingness to borrow in the light of expectations of improved prices and markets to follow from EEC membership. Two pieces of legislation passed during the 1960s facilitated its more active role. The 1961 Agricultural Credit Act, inter alia, increased the authorised share capital of the Corporation; raised its borrowing limit; simplified its procedures for taking land as security for loans; and permitted the Corporation to engage in hire purchase lending. The 1965 Agricultural Credit Act enabled the ACC to take deposits from the public and so provided the basis for the subsequent increase in its resources. Annual lendings grew to £4.9 million by 1965 and to £17.5 million by 1972. Total assets grew to almost £12 million by 1965 and to almost £41 million by 1972.

3. The level of the Corporation’s activities expanded dramatically in the 1970s. Investment in agriculture increased as farmers availed of the opportunities provided by EEC membership. The ACC expanded its organisational structure to meet the increased demand for credit. The Chairman of the ACC, in his evidence to the Joint Committee, pointed out that the 50th anniversary of the ACC occurred in 1977 and that the Corporation had done more business in the three years to that date than in the previous 47 years of its existence.¹ Advances amounting to £143 million, representing over 23,000 individual loan transactions, were issued in 1978. The ACC’s total assets increased from £125 million at the end of April 1975 to £340 million at the end of September 1979. Allowing for inflation, this represents a three-fold increase in business since 1972.

TABLE 1

ACC and Associated Banks Lending to Agriculture, 1975-78

Notes: Associated Banks lending in November each year. ACC lending at end-December each year. ACC lending includes lending to agribusiness.

(b) Legal character

4. The Agricultural Credit Act 1978, which consolidated and amended the Agricultural Credit Acts 1927 to 1975, sets out the objects, constitution, functions and financing of the ACC. The ACC is responsible to the Minister for Finance, who holds all the issued share capital and appoints the directors. When the ACC was established, it was intended that the Associated Banks would be the principal shareholders with the State taking a minority interest and appointing a minority of the directors. In the event, this situation did not materialise and the State became the sole shareholder in the 1940s. The 1978 Agricultural Credit Act, however, retains the provision whereby shares may be allocated to other persons.

5. The Minister is concerned with the overall policy of the ACC but does not intervene in its day-to-day operations. He approves the Corporation’s annual budget, changes in interest rates on loans and deposits and changes to the limit on the ACC’s borrowing powers, maintains oversight of its general financial performance and is responsible for amending legislation in the Oireachtas.

(c) Operations

6. The principal business of the ACC is the advancing of loans and hire purchase facilities for any purpose which, in its opinion, is of benefit to agriculture, horticulture or fisheries. The extension to fisheries was included in the 1978 Agricultural Credit Act, though to date no loans have been advanced in this area. The ACC has recently started lending to agribusiness; in 1978, £30 million was advanced to firms in the agricultural processing industries such as creameries, meat factories and grain millers.

7. The main demands for loans relate to the purchase of livestock, buildings and machinery, seeds, grain and fertilisers, working capital, land purchase and improvement, and family settlements. The distribution of the Corporation’s lending between these activities in recent years is shown in Appendix 1. Of particular interest is the Corporation’s scheme of development loans, designed to encourage planned development of farm enterprises. These loans are given on the basis of plans submitted by prospective borrowers, and repayment terms are geared to suit the type of project involved. In 1979 over £13 million was advanced for development loans.

8. Repayment periods vary from one to two years for short-term loans to fifteen years for land purchase. Interest rates in December 1979 ranged from 17½ per cent for seasonal loans payable within one year to 18¾ per cent for term loans of ten years and over. Loans are issued at the interest rate ruling on the date of issue and, with the exception of some loans issued prior to 1975 at a fixed rate of interest, are liable to interest rate variations from time to time.

9. Before 1965 the Corporation’s resources came entirely from the Exchequer in the form of shareholders’ funds and loans. Total Exchequer advances outstanding at 31 December 1978 were £12.5 million. However, deposits are now the principal means by which the Corporation finances its activities. The proportion of total resources represented by deposits increased from 59 per cent in 1975 to 81 per cent in 1978. New lendings are financed in the main from deposit income and repayments of existing loans. The Corporation has not had recourse to the Exchequer for additional finance since 1973. ACC deposits carry a State guarantee and enjoy the status of a trustee security.

(d) Objectives

10. The successive Agricultural Credit Acts did not set explicit objectives for the ACC. In 1977 the ACC Board invited a firm of management consultants to assist it in defining its basic goals. The objectives of the ACC which were agreed as a result of the consultants’ recommendations were:

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.

11. These objectives raise important issues about the role and scope of the ACC. At the time of its establishment, particular types of credit were virtually unavailable to Irish farmers. The ACC was set up to provide a specialised credit service particularly of medium and long-term loans. More recently the Associated Banks have shown themselves much more willing to lend to agriculture and farm-related activities. At the same time the ACC has expanded the range of its services to include seasonal and short-term finance, so that it is now in direct competition with the commercial banks for particular types of credit. In their evidence , both written and oral, to the Joint Committee, the ACC made clear their desire to be the prime source of finance for Irish agriculture and stated that they were trying to ensure that “to the best of our ability a comprehensive total service will be supplied at local and regional level”.²

12. To establish the ACC as the major force in agricultural lending is clearly a different role to that originally envisaged of being a marginal supplier of specialised credit. In the opinion of the Joint Committee, however, there are a number of reasons why the State might wish to sponsor such an agricultural lending agency, even where the commercial banks are willing to provide funds for certain types of agricultural lending. The State might fear that there may be times when commercial bank lending may be inadequate, in the aggregate, to meet the needs of agriculture. Where the commercial banks are unwilling to provide certain forms of finance, such as long-term loans, then it is to the farmer’s advantage that he has the option of obtaining all his credit requirements from the one institution. The State might wish to bring about greater competition in banking services; by operating a credit institution it can influence the terms and volume of agricultural lending more directly than by regulation or exhortation of the commercial banking system. Finally, the State might wish simply to have a stake in a profitable investment which will yield revenue to finance its other activities.

13. The Joint Committee believes that the ACC fulfils a useful function. It provides specialised credit to agriculture which would otherwise be unavailable; it stimulates competition at the short end of the credit market; it provides an assurance that the credit needs of agriculture will be met; and it is, at least potentially, a net contributor to State funds. However, in evaluating the ACC’s operations and financial performance, the Joint Committee does not see any inherent reason why these functions should not be provided on commercial terms. The Joint Committee supports the view of the Chairman of the ACC who, in his evidence, stated that “the criterion is the pursuit of efficiency (and) to the extent that we are, and remain, efficient we will be entitled to be considered as another suitable bank for specific purposes”.³ The Joint Committee sees no reason to object to the ACC’s attempt to achieve a dominant position in the agricultural credit market.

II FINANCIAL PERFORMANCE

(a) ACC profitability

14. There is not, either in the 1927 Act which established the ACC, or in subsequent legislation, any proper definition of the commercial objectives of the ACC. Although there was a general understanding that the Corporation should be run along commercial lines, there was no real attempt in its early years to provide the State with a satisfactory return on its capital. The Corporation’s principal emphasis was on providing suitable finance to farmers to develop and increase their output. However, in the set of objectives accepted by the Board in 1977, the need to attain a sufficient level of profitability to provide a realistic return on capital employed is clearly recognised. The Joint Committee, as already made clear, fully endorses this objective.

15. While the ACC has experienced a very rapid increase in its business in recent years, its trading profit has remained modest (see Table 2). In these years the Corporation’s profitability was affected by its policy, up to 1975, of fixed interest rate lending and by the substantial losses on its foreign borrowing arising out of the depreciation of sterling. The ACC has not paid a dividend to the Minister for Finance since 1973/74, when only 1% net of tax was declared. Profitability has improved since 1976 although the outcome for 1979 is expected to be below target.

TABLE 2

ACC Profitability, 1975-78

Note: Negative figures are shown in brackets.

16. Until the early 1970s a large proportion of the ACC’s loans were financed from funds at fixed interest rates, and the Corporation’s policy was to lend at fixed interest rates. During the 1970s, however, the ACC became more dependent on deposit income to finance loans, where interest rates on deposits varied in line with the market rate. In 1973 and 1974 deposit interest rates rose to exceptionally high levels compared to previous experience, and the Corporation’s profit margin was immediately squeezed. In 1975 the ACC altered its lending policy. All lending, other than hire purchase and European Investment Bank funds for on-lending to agribusiness customers, is now at variable interest rates. Only a very small amount of fixed interest lending is still outstanding, so this is no longer an important factor influencing the Corporation’s profitability.

17. In the early 1970s the demand for loans from farmers was greater than what the Corporation could finance from its domestic resources. It therefore borrowed abroad in 1974, with the approval of the Department of Finance and the Central Bank, in order to augment its domestic resources, recognising at the time that it was possibly exposing itself to an exchange risk. In the event the Corporation suffered substantial losses due to the depreciation of sterling. These losses were finally eliminated from the balance sheet in 1979.⁴

18. The ACC’s foreign borrowings amounted to the equivalent of £IR27.5 million at 31st December 1978 (compared to total assets in the balance sheet at end—1978 of £314 million) and had increased to the equivalent of £IR41.5 million at 31st December 1979. Part of this borrowing is from the European Investment Bank (EIB), and is restricted to the food processing industry. Also, the ACC towards the end of 1979 borrowed £25 million in EMS currencies. In both these cases the Government is carrying the exchange risk.

19. The State guarantee of the Corporation against the exchange risk on its foreign borrowings is undertaken under section 12 of the 1978 Agricultural Credit Act. Contrary to what it appears at first sight, this guarantee does not represent an implicit subsidy to the ACC. The funds are borrowed at relatively low interest rates, and are on-lent to farmers at the Corporation’s normal interest rates on borrowings. Any difference between the borrowing and lending rates greater than the ACC’s administrative margin is returned to the Exchequer and is available to secure the latter against exchange losses, if any. Depending on the movement of exchange rates between the Irish £ and the EMS currencies, the Government may lose or gain from the transaction. The benefit of the State guarantee therefore accrues to farmers rather than the ACC, though the farmer of course pays for this guarantee in the form of higher interest rates.

20. The Joint Committee is of the view that improved profitability should be a key concern of the ACC Board and management over the next five years. It should be the ACC’s intention to be in a position to adequately remunerate the State’s equity in the Corporation by the end of that period. Improved profitability is also the key to strengthening the Corporation’s balance sheet, which is the topic we turn to next.

(b) The ACC’s balance sheet

21. The ACC has drawn attention to a number of obvious weaknesses in its balance sheet when this is examined using the criteria applied to other financial institutions. In its submission to the Joint Committee, it comments: “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”.⁵ The Corporation’s balance sheets for 1977 and 1978 are reproduced in Table 3.

22. For a financial institution, the ACC is highly illiquid. Net liquid assets were in fact negative in 1978, with cash on hand and on deposit being exceeded by loans and bank overdraft, while lending (mainly medium and long-term) exceeded deposits (mainly withdrawable within one month). It is also under-capitalised, with shareholders’ funds increasing from only 2% to 3½% of total assets between 1977 and 1978. If the ACC was a normal commercial bank, depositors would be very wary of lending their money to it in this state. The survival of the ACC in these circumstances is accounted for wholly by the fact that it is State-owned and that its deposits are guaranteed by the State.

TABLE 3

The ACC Balance Sheet, 1977 and 1978

23. In defence of the ACC, however, it can be argued that the present state of its balance sheet is the consequence of a number of years of hectic expansion, arising from the need to ensure that the unprecedented opportunities for Irish farming arising from EEC accession were not restricted by lack of available credit. Certainly the ACC itself now accepts the need to move rapidly to a situation where its financial ratios are more equivalent to those of similar financial institutions.

24. Among the reasons why it is desirable to strengthen the Corporation’s balance sheet are the following:

—undercapitalisation would place a constraint on the further growth of the Corporation in the longer term.

—the need to move towards official norms for commercial banking, as laid down by the Central Bank, both because the norms represent standards for prudent and responsible banking practice, and because they would be a prerequisite for a banking licence should the ACC ever wish to apply for one.

—the EEC’s first Directive on credit laws and regulations, which will lay down solvency and liquidity regulations for credit institutions in Member States, may well be applicable to the Corporation by 1985.⁶

—the Corporation, as a significant operator in the credit market, must expect to be subject to the same requirements as other financial institutions operating alongside it.

It can be added that a strengthened balance sheet would be essential if it should be decided that the ACC should seek additional equity finance from farmers or the private sector.

25. In order to improve its balance sheet, the Corporation has set itself targets for certain key ratios which it hopes to achieve by 1985. The ACC has indicated privately to the Joint Committee how it expects these targets to be achieved. The Joint Committee stresses that the achievement of the target ratios is dependent on achieving an adequate level of retained profits.

26. The Joint Committee strongly endorses the efforts of the ACC to achieve these key ratios by 1985. While the Committee was concerned that the effort to achieve adequate liquidity in the next five years could lead to constraints on the available funds for farm lending, it nevertheless recommends that the ACC should strive to attain the targets over the time period irrespective of occasional ups and downs in the credit situation. The Committee also notes that the targets are interlinked and depend crucially on achieving the target Gross Operating Margin. The ACC believes its target margin to be narrower than that obtained by its competitors. ⁷The Committee therefore recommends that the Department of Finance, in reviewing proposals for interest rate changes from the ACC, should bear in mind the importance to the Corporation of achieving an adequate operating margin. The Committee was concerned to learn that the structure of interest rates to both borrowers and lenders in 1979 was such that for a significant part of the year the ACC’s gross operating margin fell well below its target rate.

27. It is perhaps necessary to emphasise here that the ACC does not come under the control of the Central Bank, and so does not have to adhere to the liquidity ratios prescribed for financial institutions, nor is it required to abide by any quantitative credit guidelines which may be in force from time to time. The fact that the ACC does not have to meet the primary and secondary ratios laid down for the associated banks, and therefore does not have to tie up resources in cash or less profitable lending to the Exchequer, can be seen as an advantage, equivalent either to a subsidy to the ACC or, perhaps more justifiably, as a tax on the associated banks. The ACC has told the Joint Committee that it sees the need, for the reasons set out in paragraph 24, to bring its financial ratios into line with other financial institutions of a similar nature, but the question arises whether it should be formally placed under Central Bank control and with an obligation to meet Central Bank requirements. The Joint Committee agrees that similar financial institutions should compete on an equal footing. The immediate task of the ACC is to restore a degree of liquidity to its balance sheet and to build up its reserves through retained profits. Movement towards these targets will also bring the ACC’s financial ratios more into line with other financial institutions of a similar nature. When the ACC’s objectives in this respect have been achieved, then the advantages and disadvantages of placing the ACC under the formal control of the Central Bank should be considered.

(c) Social constraints on ACC profitability

28. The Joint Committee sought to determine whether there are any social constraints on the commercial nature of the ACC’s operations which might influence its profitability and affect its ability to attain its financial targets. The Joint Committee concluded that the ACC’s financial performance should not be inhibited in this respect. While the ACC is willing to roll over loans in cases where farmers have difficulty in meeting their repayments, there is no evidence that the ACC is more lenient in this respect than the commercial banks. The ACC insists that those to whom they lend have a very good record in repayments.⁸ There are also occasions when the ACC may be asked by the Government to extend support to a particular operation in the food industry. In all such cases the Corporation would be guaranteed by the Minister against loss. The Corporation does offer preferential rates of interest to small farmers, who require finance for general productive purposes, at about 1% below that obtaining for farming generally. Both the level of preference and the amount of lending are relatively small, and it is not significant in the Corporation’s overall activities.

III OPERATIONS

(a) Current account facilities

29. The range of banking services currently provided by the ACC is comprehensively outlined in Appendix 2. It operates a wide variety of loan and instalment credit facilities for borrowers, while for depositors, the ACC operates a savings scheme similar to the commercial banks. Compared to the latter, however, the ACC does not as yet provide a full banking service. In particular, it cannot provide current account, non-agricultural loan or overdraft facilities at the present time.

30. It has been argued that the Corporation loses potential customers by not being able to offer current account facilities.⁹ It is also unable to benefit from the use of current account deposits at zero interest rates. On the other hand, the introduction of current account facilities would be expensive. It would require significant organisational changes and it would bring the ACC further into direct competition with the commercial banking system. In evidence to the Joint Committee, the Chairman of the ACC recognised that the occasional demands for full banking facilities for the ACC were associated with problems which have occurred in the commercial banks, and that once these problems have been resolved, the demands fall away very rapidly.¹⁰ However, irrespective of the intrinsic merits or otherwise of the proposal to introduce current account facilities, it is not a feasible proposition in the immediate future. It would require a licence from the Central Bank and this is unlikely to be forthcoming given the current state of the ACC’s balance sheet.

31. The present policy of the ACC is to concentrate its efforts on improving its balance sheet so that by 1985 it would be in a position to apply for a banking licence and introduce current account facilities should that be considered desirable. The ACC itself has an open mind at present as to whether a banking licence would be desirable or not, though it agrees that such a licence would increase its attractiveness to its customers.¹¹ The Joint Committee agrees that strengthening the Corporation’s balance sheet should have priority at the moment. It recommends that, in the meantime, the Corporation should undertake a full study of the costs and benefits of introducing current account facilities or possible alternative “half-way house” systems. Such studies would help towards an informed decision if, by the mid-1980s, the issue is raised again.

(b) Non-agricultural lending

32. Lending for non-agricultural purposes is directly linked to the issue of current account facilities and approval of a banking licence. The ACC’s inability to offer loans or personal overdrafts reduces its attractiveness to potential depositors. It is at a disadvantage, for example, with a growing number of urban depositors in being unable to advance house loans. If the ACC obtained a banking licence, it would see it as imperative that it would have the facility to offer current accounts (and therefore personal overdrafts).¹² On the other hand, this would open up a major new claim on ACC funds and divert resources from agricultural lending.

33. There are other issues involved. Under the 1978 Agricultural Credit Act, the ACC is restricted to lending for agricultural, horticultural and fisheries development purposes. There may be risks in confining lending to one economic sector and being so closely associated with its fortunes. The risks, though proportionately the same, were absolutely quite small as long as the Corporation provided a specialised and relatively small credit service to agriculture. The risks are much larger now given the greater size and importance of the ACC today as a lender to agriculture. It is also possible that the fact that the ACC is confined to broadly agricultural lending could create difficulties in the event that it did seek a banking licence. One of the conditions attaching to a banking licence is that “a holder of a licence shall not have more than 20% of risk assets concentrated in any one sector of business or economic activity which is subject to a common predominant risk factor”.¹³ It is possible that the ACC as at present constituted might have difficulty in meeting this criterion if it were strictly interpreted.

34. An extension of the ACC’s powers to permit non-agricultural lending is clearly a complex question. However, because it is directly linked to the question of full banking facilities and the acquisition of a banking licence, it is not on the immediate agenda. Assuming that the ACC is successful in meeting its financial targets by 1985, the question of extending the ACC’s lending powers will need to be further discussed, taking into account the implications of any decision by farmers or co-operatives to seek an equity stake in the ACC. The Joint Committee would wish to return to this question nearer the appropriate time.

(c) Agri-business lending

35. The ACC provides a package of short, medium and long-term loans to merchants and co-operatives engaged in food processing and ancillary services. This is a relatively new area of lending for the ACC; currently £30 million is outstanding to this sector, divided between £15 million short-term and £15 million long-term finance.

36. The ACC sees agribusiness lending as a natural complement to its on-farm lending.¹⁴ It is an important component in the overall credibility of the ACC as a farmers’ bank. The ACC recognises the greater risk attached to agribusiness lending, and far stricter criteria are used in assessing a loan application from a commercial firm than from a farmer. A large part of the ACC’s agribusiness lending is financed by loans from the EIB which has its own criteria for lending.¹⁵ Projects receiving EIB funds therefore are vetted twice before they are approved for a loan. As a further safeguard, the ACC has the power to put someone on the board of an agribusiness firm, and at co-op level it has observers who attend all committee meetings each month to keep it informed of what is going on.¹⁶ To date the repayment record of their agribusiness borrowers has been good.

37. The ACC’s view is that no conflict of interest exists between lending to agribusiness and lending to farmers. This is partly because a large part of that lending is financed from the EIB which is a source of funds not available for lending to the ordinary farmer, and partly because much of the remainder represents seasonal finance to enable merchants and co-operatives to purchase grain from farmers.¹⁷ In the event, however, that funds were ever short, it has been the policy of successive Boards to concentrate resources at farm level.¹⁸

38. The ACC is still at the stage of building up expertise and a record of lending in the agribusiness area. The overall development of the agricultural potential of the country requires investment in the processing and marketing of farm products just as much as investment at farm level. The Joint Committee is satisfied that this is a legitimate area of activity for the ACC.

(d) Lending for land purchase

39. In view of the criticism levelled at lending institutions in recent years that their policies have contributed to the general increase in land prices, the Joint Committee examined the Corporation’s policy with respect to land purchase loans.¹⁹ The proportion of the ACC’s total lending allocated to land purchase, which was 14% in 1977 and 15% in 1978 (amounting to £16 million and £21 million respectively) is agreed with the Department of Finance. The maximum amount the Corporation will lend for the purchase of land is £40,000, or £50,000 to those who are depositors with it. An ACC survey in 1977 showed that the average size of holding assisted by the ACC to purchase land was 66 acres, and the average increase in that holding was 33 acres. Before any application for land purchase is finalised, a local inspection is carried out by an ACC officer who assesses the home situation and the potential of that farm. He puts a value on a piece of land and a potential borrower will not get ACC support if he goes beyond this. Where several of its customers are involved in bidding for the same piece of land, the Corporation endeavours to ensure they do not bid against each other leaving the ACC to finance what would then be an unnecessarily and artificially high price. In any case, the Corporation will only advance money for land purchase to a bona fide farmer. In cases where large holdings come on the market the ACC is quite prepared to consider group applications, though the credit-worthiness and repayment capacity of each member of the group would have to be assessed separately. The Joint Committee was satisfied that, with these safeguards, the ACC did not act as a “price leader” in putting upward pressure on the price of land.

(e) Interest rates

40. ACC interest rates in December 1979 ranged 17½% for seasonal loans to 18¾% for term loans of 10 years or more. Comparable commercial bank lending rates ranged from 17¼% on overdrafts to 19¼% on 5-7 year loans. The ACC thus has a narrower spread between short-term and long-term interest rates than the commercial banks. There are calls from time to time that interest rates for farm borrowings should be subsidised. While this is primarily a matter for the Government rather than the ACC, the Joint Committee points out that there is provision for interest subsidies to be paid in lieu of capital grants under the Farm Modernisation Scheme. The Joint Committee does not feel that there is any case for the general subsidisation of interest rates on farm borrowings, even if this were permissible under the Treaty of Rome.

(f) Deposits policy

41. Deposits are the other side of the coin to lending. They represent the life-blood of the organisation. The ACC is almost totally dependent on the growth of its domestic deposit resources to finance further increases in lending. From the ACC’s viewpoint it is important that incentives for depositors remain as attractive as possible in relation to those offered by competing institutions. Although ACC deposit rates have moved closely in line with those of building societies, ACC rates have been consistently below building society rates over the past five years. The ACC is in no doubt that the State guarantee on its deposits is a key factor in influencing the small saver and non-resident investors in particular to invest with it.²⁰ It is particularly vital at the present moment having regard to the current financial condition of the Corporation.

42. It might be argued that the State guarantee of ACC deposits represents an implicit subsidy to a commercial undertaking. The cost of this subsidy is the expected size of any future default by the ACC on its borrowings from depositors. Given prudent financial management and a strengthened balance sheet, this risk should be negligible, but it is nonetheless a real one. However, there are no economic grounds for opposing the continuation of the State guarantee, provided that this element of risk is recognised and compensated for in the rate of return required by the State on its equity in the Corporation. The Joint Committee therefore supports the continuation of the State guarantee on ACC deposits, with the proviso that the State should be compensated for the risk it carries in the calculation of the required return on its investment in the ACC.

43. While the State guarantee on deposits gives the ACC a competitive edge over competing institutions, the ACC’s depositors do not enjoy the tax concession on interest up to £70 (£140 in the case of a joint account) given for example to depositors with the commercial banks. (The ACC also operates under the disadvantage of being unable to offer overdrafts or house loan facilities to prospective depositors, as discussed in paragraph 32 et seq.) This appears an anomalous situation to the Joint Committee. The only possible justification, aside from the financial loss to the Exchequer which would be involved in granting the concession, is that withholding it is a quid pro quo for the cost to the State of providing the State guarantee (recall that while this is not a financial cost at least for the present, it represents the risk of default borne by the State which could involve it in financial outlay at some point in the future). The Joint Committee recommends that the Minister for Finance investigate the possibility of extending the tax concession to ACC depositors.

IV ORGANISATION AND MANAGEMENT

(a) Regionalisation and decentralisation

44. The organisational structure of the ACC has evolved with the expansion of the Corporation’s activities over the years. Until 1961 the Corporation’s staff never exceeded 45 because of the small scale of its operations. With the passing of the 1961 Agricultural Credit Act, which stimulated the first stage of the Corporation’s recent growth, the first agricultural officer was appointed; and in 1963 a small number of local credit agents were appointed.

45. Following a study of the U.S. credit system, the Corporation began to open Area Offices throughout Ireland during 1965/66 and to appoint agricultural science graduates to take charge of these offices. By 1971 the total staff of the Corporation was 164, of whom 30 were located in local offices. Following a report from a firm of management consultants in 1972, the Corporation regionalised its operations and devolved many administrative functions from its Head Office to local and regional offices. Further restructuring was introduced in September 1978 with the purpose of making a clearer distinction between those functions which are directly concerned with operating the business and those which are concerned with planning and control on an overall basis. By 1979 the staff had increased to 606, of whom 213 were located in local and regional offices throughout the country. The local offices are seen by the ACC as the main plank in its marketing strategy, and it is planned to have 50 offices during 1980.²¹ In recent years the emphasis has been on locating new offices in relation to potential deposits rather than lending opportunities.

46. Along with the growth in the number of local offices, the ACC management has pursued a policy of management decentralisation, in which work functions have been moved from Head Office to the local offices. The latter have been given greater autonomy in the interests of more rapid decision-making and more effective marketing. The ACC believes that a large part of its rapid development in recent years is due to this deliberate policy of giving as much discretionary authority as possible to local officials in making loan decisions. It believes that its local officials now have much more discretion and latitude available to them than is given to local officials in competing institutions.²²

47. The Joint Committee inquired whether any adverse effects were associated with these policies of regionalisation and decentralisation, such as an excessive growth of overhead costs or the possible loss of financial control.²³ The Committee was satisfied that strict criteria are applied to the opening of new offices. The Committee was also informed that an internal audit division was brought into being in 1975 in a formalised way as part of the Corporation’s financial control procedures. The Joint Committee emphasises the need for adequate machinery and controls to oversee what is now a substantially decentralised operation.

(b) The Board

48. The Board of the Corporation is appointed in accordance with the Agricultural Credit Act 1978. The number of Directors may not be greater than seven nor less than three. Normally there are seven Directors, all appointed by the Minister for Finance. Traditionally, ACC Directors have been people drawn from the farming community or from agricultural-based industries and are typically from a rural background. The Joint Committee believes that the Board would be strengthened by the addition of persons with proven ability and experience in the areas of finance and marketing. The Committee also believes, in the interests of continuity and of strengthening the relationship of the Chief Executive with his colleagues in top management, that there would be advantages in appointing the Chief Executive to the Board as a normal practice. There are at present three vacancies on the ACC Board, and the Committee recommends that the Minister for Finance should take these views into account when considering his next appointments.

(c) Relations with the Department of Finance

49. The ACC has a close working relationship with the Department of Finance, who are involved by statute with matters of general ACC policy. The ACC in their evidence to the Joint Committee stated that the relationship is working well.²⁴ One of the functions of the Department is to approve changes in the Corporation’s interest rates. As noted in paragraph 26, the Department has delayed approval of changes in either borrowing or lending rates in the past because of the wider policy implications of such changes for competing lending institutions. This has resulted in a loss of revenue to the Corporation. While the Committee appreciates the wider implications which the Department has to bear in mind, and while it certainly does not favour automatic granting of ACC applications without a thorough vetting, it would reiterate the need to ensure that the ACC achieves its target financial ratios. Given the overriding requirement over the next five years to strengthen the Corporation’s balance sheet through retained profits, the Joint Committee recommends that the Department give early decisions in relation to ACC requests for interest rate changes in the future.

(d) Staff remuneration

50. Various State-sponsored bodies have indicated that they have experienced difficulties in recruiting and retaining staff because of the public sector pay constraints which apply to them. The Chairman of the ACC, in his evidence to the Joint Committee, indicated that this was a serious problem for the ACC also.²⁵ The recent recommendations of the Review Body on Higher Remuneration in the Public Sector (Report No. 20), if implemented in full by the Government, should ease this situation. At this stage the Joint Committee can only reiterate the recommendation it made in its recent report on Bord na Móna that the salaries of senior managers be kept under continuous review, particularly with respect to the effect present policy has on the quality of recruitment to senior managerial positions.

V THE ACC AND FARMER OWNERSHIP

(a) General

51. From time to time there are suggestions that the ACC should become a co-operative bank, owned and controlled by farmers themselves either directly or through their primary co-operatives. Provision was made in the 1961 Agricultural Credit Act, and repeated in the 1978 Agricultural Credit Act, whereby shares may be allotted and issued to persons other than the Minister for Finance with his approval. The Joint Committee therefore sought the opportunity to discuss with representatives of the Irish Co-operative Organisation Society Limited (ICOS) and of the ACC whether there were any current proposals to bring about greater farmer involvement in the ownership of the ACC and, if so, the degree of progress that had been made.

52. The ICOS, in its evidence to the Joint Committee, repeated its aspiration to see a co-operative agricultural bank established in this country.²⁶ It pointed out that every other European country, except the United Kingdom, had some form of co-operative agricultural banking system. In some of these countries the system involved both the State and the farmers. Agricultural co-operatives in Europe had found involvement in banking a necessary prerequisite to diversifying their activities into other areas. The ICOS saw the ACC as the obvious nucleus co-operative agricultural bank and, with the approval of the ICOS, the ACC participated as the Irish representative in the representative organisation of co-operative banks in Europe. In the ICOS view, the ACC is an “intending co-operative” though it would require the support and co-operation of the ICOS, farmer and other organisations if it were to become a co-operative.

53. The Chairman of the ACC, in his evidence to the Joint Committee, stated that the Corporation would welcome greater farmer involvement and the capital injection that would bring. There had been a number of previous proposals to the Minister for Finance with regard to greater farmer involvement, the most recent being five years ago, but none had come to fruition. He pointed to some of the difficulties there would be in changing the status of the ACC from a State-sponsored body. He feared in particular the loss of the State guarantee on ACC deposits, and felt that the farm organisations, individual farmers or co-operatives would not be in a position to provide the necessary equity capital. He also expressed doubt, given the profit record of the ACC and the current state of its balance sheet, that farmers or co-operatives would be willing to invest equity in the ACC at the present time. He felt that the right course of action was to wait until the ACC balance sheet had improved before serious negotiations to turn the ACC into a co-operative bank should begin.

(b) The Merchant Bank proposal

54. The ICOS has recently proposed the establishment of a new Merchant Bank, with participation by major co-operatives including Farm Business Development, the Dutch co-operative agricultural bank, Rabobank, and the ACC. The intention is that the bank would play a major role in the financing of food exports from Ireland. The advantages the ICOS sees for this proposal, and the role it sees for the proposed Merchant Bank in moving towards the ultimate goal of turning the ACC into a co-operative bank, are as follows:

—the Irish food industry, with its high export orientation, suffers a particular competitive disadvantage in comparison with its European competitors due to the high cost of funds in Ireland, which could be overcome by improving access to additional sources of foreign currency lending.

—although the co-operatives would like to become involved in banking, they recognise that the funding of an equity stake in the ACC itself at the present time is not feasible, but the need for a new service provides the opportunity to make a start along this road.

—the ACC has only a minor role in lending to agribusiness currently, and has little record of expertise in this area; by participating with the other partners in the proposed merchant bank, the ACC could quickly increase its stake and expertise in this area.

—the involvement of the ACC would also minimise any possible conflict of interest, and the mutual experience of working together would, if the proposed bank was successful, facilitate the ultimate goal of turning the ACC into a co-operative bank.

55. The ACC, on the other hand, while expressing a willingness to consider the proposal further, was sceptical of both the usefulness of the proposed merchant bank and its likelihood of getting off the ground. It felt, in general, that there were sufficient banking institutions to ensure that the needs of potential customers were adequately met, and that a new institution would be in competition with the ACC itself, both on the lending and, in particular, on the deposits side. On the specific point that a new merchant bank could make additional funds available to coops at a cheaper rate, the ACC felt that there was at present no shortage of funds for worthwhile projects, and that the cheaper rate of interest on loans in foreign currencies was matched by the exchange risk involved. The ACC already had contacts with the Rabobank through its involvement with the representative organisation of co-operative banks in Europe, and had already shown itself willing and able to tap EMS money markets to ensure adequate finance was available in Ireland. Furthermore, its lending to agribusiness was expanding with the help of the EIB, which had shown sufficient confidence in the ACC’s expertise to choose it as the sole channel within Ireland to provide EIB funds to agribusiness firms.

56. The Joint Committee understands that a working party is envisaged to consider the merchant bank proposal in more detail.²⁷ If agreement could be reached among the parties involved, then a detailed proposal could be presented to the Central Bank and the Department of Finance for their consideration. The Joint Committee would welcome the establishment of such a working party.

57. However, irrespective of whether the proposed merchant bank goes ahead or not, it still leaves the question of the desirability and feasibility of the ACC itself becoming a co-operative bank. It was clear to the Joint Committee that the co-operative movement itself has not thought ahead to the problems that might be involved, or the mechanisms that might be used. It may therefore not seem very sensible for the Committee to comment further on a proposal that has not yet fully materialised. However, the Joint Committee would like to make some observations based on the evidence it has heard.

58. In paragraph 12 the Joint Committee set out the reasons which justified State involvement in agriculture banking. The Committee believes these reasons remain valid to-day. The ACC, in our view, has made an important contribution to the development of agriculture, particularly during the past decade. It has a tradition of expertise in on-farm lending, and it has a growing involvement in lending to agribusiness. Its major weakness in the past has been its low profitablity, and the resulting illiquidity and undercapitalisation of the organisation. The ACC has set itself the task of strengthening its balance sheet and achieving financial ratios more appropriate to an institution of its size by 1985, and the Joint Committee has already indicated the importance of improved profitability for the achievement of these targets. Until and even beyond that point, the State guarantee on ACC deposits will play a vital role in persuading investors to save with the Corporation.

59. The Joint Committee believes that, in the absence of a satisfactory profit record and balance sheet, any attempt to persuade farmers to provide equity finance to the Corporation is unlikely to succeed, particularly if there was a suggestion that the State guarantee on its deposits would be withdrawn at the same time. Even when the ACC does achieve a satisfactory profit record and is adequately remunerating its equity capital, the Joint Committee is not clear whether there would be advantages, in terms of improved banking services to farmers and agribusiness, in turning the ACC into a co-operative bank, although a notional value may be placed on the fact of ownership itself. However, when farmers or their co-operatives indicate their agreement to subscribe the necessary finance to take a stake in the Corporation, the matter can be realistically discussed by the interested parties.

VI SUMMARY AND RECOMMENDATIONS

60. The Joint Committee believes that the ACC is fulfilling a useful function by providing specialised credit to agriculture which would otherwise be unavailable and by stimulating competition in agricultural banking. In its approach to evaluating the ACC’s operations and financial performance, the Committee saw no reason why these should not be judged on commercial criteria. The ACC has become, and intends to remain, the major force in agricultural lending. It is no longer solely a supplier of specialised credit. The Joint Committee sees no reason to object to the ACC’s attempt to achieve a dominant position in the agricultural credit market (paragraphs 11-13).

61. Historically, the ACC has been more concerned with providing suitable finance to farmers than with achieving an appropriate level of profitability. In recent years its profitability has remained low, in part because of the predominance of fixed interest lending and substantial losses on foreign exchange borrowings. The Joint Committee recommends that improved profitability should be the key concern of the ACC Board and Management over the next five years, so that by the end of this period it is in a position to adequately remunerate the State’s equity in the Corporation (paragraphs 14-20).

62. In part because of the dramatic increase in lending during the period of accession to full EEC membership (a three-fold increase in real terms between 1972 and 1978), the ACC is highly illiquid and undercapitalised for a financial institution. The ACC has set itself target financial ratios to bring its balance sheet into line with similar financial institutions by 1985. The Joint Committee strongly endorses this objective, but emphasises the importance of an adequate level of retained profits for the achievement of this objective (paragraphs 21-27).

63. No significant aspect of ACC activities has a social service nature which would inhibit a commercial rate of return on the capital employed in its activities (paragraph 28).

64. From time to time there are demands on the ACC to provide current account facilities for its customers. For various reasons this is not a feasible extension of ACC activities at the present time; among other factors, it would require a banking licence which the ACC is unlikely to obtain until its balance sheet has considerably improved. In the meantime, the Joint Committee recommends that the ACC quantify the cost and benefits of providing current account facilities and any other “half-way house” proposals so that an informed decision can be taken on their desirability at an appropriate time (paragraphs 29-31).

65. A full banking licence would also be necessary if the Corporation wished to offer loans or personal overdrafts to potential depositors. An extension of the ACC’s lending powers for this and other purposes may be desirable for a number of reasons, and the Joint Committee agreed it should further discuss this question when the ACC was in a position to apply for a licence (paragraphs 32-34)

66. Lending to agribusiness is a relatively recent and expanding area of ACC activity. The provision of capital to agribusiness is important for the development of Irish agriculture, it complements the ACC’s on farm lending and it helps to maintain its image as a farmers’ bank. A large part of the ACC’s agribusiness lending is financed by loans from the European Investment Bank and so does not conflict with on-farm lending. The Joint Committee is satisfied that agribusiness lending is a legitimate area of activity for the ACC (paragraphs 35-38)

67. Lending institutions have been heavily criticised for contributing to the upward spiral of land prices in recent years, and the Committee inquired what ACC policy is towards loans for land purchase. The Committee was satisfied that sufficient safeguards are built in to the lending process to ensure that the ACC itself did not contribute to the upward pressure on land prices (paragraph 39).

68. Deposits are the lifeblood of the ACC’s activities and the Committee examined the incentives available to depositors with the ACC and with competing institutions. The State guarantee of ACC deposits is tremendously important in influencing small savers and non-resident investors to invest with the ACC. The Committee considered whether this guarantee represented an implicit subsidy to a commercial organisation, but concluded that no subsidy was involved provided that the cost of the guarantee was recognised in the State’s return on its equity in the Corporation, and it recommends that the guarantee be continued. It also recommends that the Minister for Finance should investigate the possibility of extending to ACC depositors the tax concession on interest up to £70 (£140 in the case of a joint account) available to depositors with the commercial banks (paragraphs 40-43).

69. The ACC’s organisational structure has adapted to the rapid growth in the volume of lending. It now has a substantially decentralised operation based on almost 50 local and regional offices which is a key factor in its marketing strategy. The Joint Committee emphasises the need for adequate machinery to maintain financial control (paragraphs 44-47).

70. The Joint Committee recommends that the Board of the ACC would be strengthened by the addition of persons with proven ability in the areas of marketing and finance. It also recommends that the Chief Executive of the ACC should be appointed to the Board as a normal practice (paragraph 48).

71. While relations with the Department of Finance apparently work well, the Joint Committee recommends that, in reviewing proposals for interest rate changes submitted by the ACC, the Department should bear in mind the importance to the Corporation of achieving an adequate operating margin, and that an early decision should be given on ACC proposals (paragraph 49).

72. The ACC has intimated that the application of public sector pay restraints to the salaries of senior management has affected it adversely. While the recommendations of the Review Body on Higher Remuneration in the Public Sector, if implemented in full by the Government, should ease this situation, the Joint Committee reiterates its recommendation made in an earlier Report that the salaries of senior managers be kept under continuous review (paragraph 50).

73. The Joint Committee explored the possibility that the ACC might become a co-operative bank under farmer ownership in the near future. It would welcome the establishment of a working party to study the desirability of a new merchant bank, with ACC participation, to service the financing needs of agribusiness. There is at present no formal proposal to turn the ACC into a co-operative bank. The Committee recognises the reasons why the ACC at this moment would appear to be an unattractive investment to farmers and their co-operatives. When they indicate their agreement to subscribe the necessary finance, the co-operativisation of the ACC can be realistically discussed by the interested parties (paragraphs 51-59).

VII CONCLUSION

74. The Board of the ACC appointed a Receiver to the McCartin Group of Companies, under a deed dated 8 February 1980. The Committee is conscious of the importance of this matter for the companies concerned, the economy of County Leitrim and the ACC itself. On the date of the adoption of this Report, the Receiver’s examination was still in progress, and the Committee was not therefore in a position to make any informed comment. However, the Committee intends to consider the matter when it becomes feasible for it to do so.

75. Written submissions received from the ACC and the Irish Co-Operative Organisation Society Limited are reproduced in Appendices 2 and 3, respectively. Oral evidence was taken from representatives of both organisations. The Joint Committee was appreciative of the ready manner in which those who gave oral evidence responded to questions.

76. The Joint Committee appointed Mr. Alan Matthews, Lecturer in Economics, Trinity College, to assist it in this enquiry. The Joint Committee wishes to express its thanks to him for the help and advice he has afforded it.

16 April 1980

¹ See Evidence (Question 13)

² See Evidence (Question 4)

³ See Evidence (Question 6)

⁴ See Evidence (Question 8).

⁵ See Appendix 2.

⁶ First Council Directive of 12 December 1977 on the Coordination of Laws, Regulations and Administrative Provisions Relating to the Taking Up and Pursuit of the Business of Credit Institutions (77/780/EEC).

⁷ See Evidence (Question 81).

⁸ See Evidence (Question 24).

⁹ See Evidence (Question 17).

¹⁰ See Evidence (Question 10).

¹¹ See Evidence (Questions 9 and 10).

¹² See Evidence (Question 17).

¹³ Central Bank Annual Report, 1975.

¹⁴ See Evidence (Question 34).

¹⁵ See Evidence (Question 42).

¹⁶ See Evidence (Question 35).

¹⁷ See Evidence (Question 42).

¹⁸ See Evidence (Question 43).

¹⁹ See Evidence (Questions 29 to 33).

²⁰ See Evidence (Questions 65 and 73).

²¹ See Evidence (Question 45).

²² See Evidence (Question 49).

²³ See Evidence (Questions 44, 45 and 47).

²⁴ See Evidence (Question 50).

²⁵ See Evidence (Question 57).

²⁶ See Evidence (Questions 83 and 84).

²⁷ See Evidence (Questions 159 and 166).