For most Australians in business or farming the Banking Royal Commission will not make any significant difference. It is not so much a question of banks
tightening their lending criteria, as them tailoring loans to the clients’ needs. It is of course much easier to let the computer do the work, putting people out of jobs to boost the boss’s pay packet, but it is not nearly as good for borrowers as having people manage their loans. Banks should tailor their loans to suit the clients’ ability to service and repay the debt. Attention needs to be given to long term past profitability, not the fantasy that some borrowers, brokers and bankers cook up, that is never likely to be achieved. Borrowers need to understand that the bank has the opposite objective to the borrower – to secure the banks position first and make the most out of the customer second. The borrower probably wants to pay the least interest and increase wealth or assets generally with the loan.
COMMON MISTAKES THAT BORROWERS MAKE
Most borrowers for whom we end up getting a bank to write off debt have done one of the following:
1. Received an interest-only loan because they could not afford to repay the loan and were unlikely to do so. The bank has therefore counted on earning interest for a while, imposing penalty rates of interest for a while, accumulating unpaid interest onto the loan then foreclosing and selling the borrowers’ property. One major bank indicated to me that that was exactly what they thought their customer had in mind. Had the bank explained that up front to the borrower, most borrowers would not have accepted the loan offered.
2. Suffered some external event like falling wool, beef or grain price, or a slump in the real property market like houses or industrial premises that prompted the bank to call in a substantial part of the loan at exactly the time when the borrower simply could not manage to do so.
3. Battled to repay in time the loan which was monitored by computer so that the computer would not recognise large payments in advance for a business dependent on several large revenue payments a year. A business might pay 5 months instalments in one go out of a payment from a customer, but when that borrower did not pay the next monthly payment due 30 days after doing so, it received default notices and threats of repossession from the bank computer.
4. Failed to cope well with some abnormal event that rendered regular payments impossible eg illness, death of an executive, flood, fire, or drought. Borrowers were often at fault too in these cases for not notifying the bank in the right way and early enough. The result was recovery action when sitting out the drought, illness or flood would have produced as good a result for the bank and a far better one for the borrower who lost everything. Communication from borrower to banker is key.
5. Borrowed from bankers who were simply ignorant about the way that borrower’s business or farm was run and how it produced profits. The bank therefore made totally unsuitable loans to them then expected the borrowers to deal with an impossible debt situation.
Many banks were thoroughly dishonest, incompetent, negligent and deliberately led borrowers into situations from which they could not escape and which enabled those banks to enrich friends by selling foreclosed properties well under market prices at particular times. The Royal Commission will not stop that. For 20 years our clients have told all federal MPs by Votergram about what the banks were doing, yet to the last those politicians went kicking and screaming , dragged to set up a Royal Commission. Don’t hold your breath for any political party that accepts big bribes from banks to do much about the problems. Don’t be lulled into false sense of security by the fact that the bribes are called “political donations”. They are bribes designed to produce a particular result and the politicians know that perfectly well. They don’t come in brown paper bags because brown paper bags are not made big enough to hold these bribes!
PRACTICES THAT MAKE MONEY
So, what solutions are available to Aussie borrowers outside of the Royal Commission report? One is for every borrower to maintain contact with the most senior banker they know by phone or visit every month or two. Think of any excuse. Particularly make contact when there is good financial news to share. Borrowers should work hard to build good relationships with bankers. That is every bit as important as making good profits from which to service and repay the debt. In many cases it is only bank directors and perhaps senior executives who are crooks. Other bank staff are often as honest as the day is long. The person granting the loan generally knows nothing of the thugs used to collect it if it defaults. Remember the story about not putting all your eggs in one basket, more appropriate when we had shopping baskets and single eggs. Wise borrowers do not keep all of their bank transactions with the one bank. To not let your left hand know what your right hand is doing is a sound principle of banking. Bank with 2 or 3 banks so that you have somewhere to go if one starts to cheat or hassle you. Build up the best relationships possible at each. Then they will probably all be vying for your business. Banks only offer good rates if there is competition.
Take “over-limit” or demand notices seriously. Nothing gets a banker angrier than having to continually report to senior management that a customer is over the limit and just ignoring notices. When someone from my superb Bendigo Community Bank phones me to let me know that one of my or my clients’ accounts is overdrawn or over limit I immediately either fix the problem there and then or explain to them how it has arisen and come to some arrangement with them. A borrower who rings the bank to say they have inadvertently overdrawn their account or to ask if they may temporarily do so, wins lots of credibility. Always put yourself in the other person’s shoes. But beware! I have sat with clients and bankers when the client said they never exceeded their limit and the banker pointed to those times when going over limit was approved by the banker, as still being defaults. If you had loaned money to someone as a business transaction to earn money, you would always be delighted to hear from that borrower even if to work through some issue to a satisfactory conclusion. It would annoy you to discover a problem when it was too late to fix. It would annoy you more to have to keep chasing the borrower without any success.
NEVER “TRUST” THE PERSON WITH WHOM YOU DO BUSINESS – CHECK EVERY ASPECT YOURSELF
Amazingly bank customers cannot believe that their banker would deliberately lead them into a debt trap just to get a bonus or advancement or boost bank profits. Christ’s spat with the money changers in the temple and Shakespeare’s “Merchant of Venice” should provide a clue to those lucky enough to read of them.
Why do bankers rob, lie and cheat their customers? I think the answer is probably the same as to the question “Why to customers mislead and rob their banks by lying and cheating about their ability or intention to repay the money they borrow then not repaying the loan as agreed.” The person who gets a bank loan by telling the bank a pack of lies about their financial situation and ability to pay, makes a thorny rod for their own back. The bank can make super profits out of them. The best way to apply for a business or farm loan is together with a banking consultant with nothing to do with that bank. The banking consultant will ensure that the application is truthful and then tailor the loan and loan agreement to the borrower’s actual ability to repay the loan. Part of that consultant’s role is to help the borrower monitor the loan to ensure that if any term in the loan contract is breached, the borrower knows about it first and contacts the lender.
The consultant’s job is also to examine the borrower’s profitability and if necessary help increase it so that the debt can be serviced and repaid on time. Often borrowers need someone to talk to about changes in business and failed plans. The banking consultant should be that person because they can quickly assess the likely impact on the loan and take remedial action. In a number of cases we have managed to move borrowers large and small from losses and overwhelming debt to profits and minimal debt. It is increased profit that makes it easy to manage debt. Minimising consulting fees is good for business, but not when the whole business and perhaps the owner’s home is lost for the sake of consulting fees. At GBAC our calculations show that, although we do not set out to do it, our clients generally make about 10 times as much as they pay from our fees. That is as it should be. I hate seeing the bank earn more money out of a business or farm than the business owner or farmer. Owners should be the bucket in which substantial profits reside, not the pipe through which their revenue flows straight out to others.
WHAT BORROWERS MOST NEGLECT
There are two faults we see most in borrowers:
1 They do not prepare or commission any sort of loan impact analysis to show them the long term impact of the loan. That is sheer lunacy! Most loans are long term and the impact needs to be known before pen is put to paper.
2. They do not read or understand the loan contract. This is an unbelievable sin. To sign an agreement without knowing what has been agreed to is madness. It mostly happens because the borrower believes that it only says, in “legalese”, that the bank has loaned the money and the borrower has to pay it back. A bank loan contract has been drawn up by the best legal brains in Australia to ensure that the contract is all one way in favour of the bank. Sometimes it has been reviewed by a borrower’s lawyer, but most lawyers know the law well but have no idea about the credibility of financial statements or the verification of budgets. Not so long ago I discovered in a little obscure clause in the middle of a loan agreement , a clause providing that the borrower would sell one of their properties before a certain date. As the borrowers had not the slightest intention of doing that, either the bank or the borrowers were being dishonest and given the behaviour that I had seen from this bank, it was probably the bank that was dishonest. The bank got the borrower to sign up the day he left hospital aftre a major operation.
Someone in the major political parties must have been bribed or those parties have no interest in family businesses and farms, to make the politicians fight so hard to hide the dishonest practices of banks and regulators of which they had been repeatedly told by Votergram to every federal MP over about 20 years. I don’t have political favourites, but if I were an individual, a small business person or farmer taken to the cleaners by my bank, wealth manager or insurance company, I would certainly be putting my sitting MP last on the ballot paper at this year’s election if I was in a safe seat, unless they have been outstanding MPs. It would just send a message to teach them a lesson that if they want to be our representatives in parliament then they need to perform a lot better than they have been doing.
Only votes hold politicians accountable.
Only marginal seats where a swing of less than about 6% of votes from the government to Labor in the final count, would elect a new MP, to determine who governs the country.
According to FairGO, voters in over 100 “safe” federal electorates do not have any impact on who wins government but they have total control over whether they send good, honest, capable people to parliament who will represent them (the voters) rather than just a political party, or not. You can find how safe or marginal your electorate is on Wikipedia’ 2019 electoral pendulum.