Land Bank on verge of defaulting on its debt

The Land Bank is in another financial pickle, with the state-owned lender facing the prospect of defaulting on its debt if government doesn’t step in.

National Treasury said the bank, whose global credit rating was downgraded to junk by Moody's two months ahead of the sovereign, approached it for more financial assistance in April. This comes over and above the R5.7 billion of government guarantees Treasury approved for the Land Bank in February.

Government, which according to one economist has not come to party in keeping the bank liquid in the recent past, is considering this new funding request, a move that will help allay fears of possible food insecurity, had the bank been left hung out to dry.

"Assistance in the form of recapitalisation and further guarantees is under consideration and would have to be accompanied by balance sheet optimisation of the Land Bank to correct the structural liquidity risk embedded in the balance sheet," said Treasury in response to Fin24's questions.

The controller of the public purse also added that it appealed to the bank's lenders to not call on debt that the Land Bank is at risk of defaulting on right now.

The Land Bank is one of few state-owned companies that remain profitable. Despite a spike in loans that moved to default stage causing a five-fold jump in its impairment charges in the 2019 financial year, the bank recorded R181 million in profit for the year.

Dr Sifiso Ntombela, trade economist at the National Agricultural Marketing Council, said the Land Bank's liquidity problems have more to do with the fact that government has not been funding it and it has been forced to rely on the open capital market to raise money, competing with banks that have no developmental mandate.

"What becomes difficult for the Land Bank is that it's still expected to play a developmental role as it is mandated to. Now you can see that you that you are already putting that state-owned entity on back foot because it has to use all its dividends from functioning loans to finance the developmental mandate," said Ntombela.

The last financial statements for 2019 show that the Land Bank received R208 million from the Department of Rural Development and Land Reform back in 2011 to support emerging farmers, and R150 million between 2011 and 2016 for wholesale funding of other farmers.

The bank generates most of its income from interest charged on loans, but also earns money from fees and commission and investment returns, among other things.

Ntombela said while making the bank compete in a free market is on its own not a bad thing, the problem is that government did not put prerequisite support in place to recognise that it's not only driven by commercial interests.

The Land Bank provides funding not only to commercial farmers, but emerging farmers. The more vulnerable segment of its customer base often struggles to keep up with repayments, especially during prolonged drought periods.

"We have about 40 000 farmers in the country.

"Only 6.5% are regarded as commercial farmers responsible for half of the employment in the sector. The bulk of the farmers in the country are guys that don't even have any muscle to go and apply in a commercial bank.

"The Land Bank then becomes a critical place for these guys to run to," said Ntombela.

He said given the number of farmers who rely on the bank, and the fact that any are able to reach communities that their commercial counterparts struggle to access and in the interest of ensuring food security, government is backed in a corner to provide the Land Bank the financial support it needs.

The Land Bank promised to respond to Fin24's questions, but no response had been forthcoming at the time of publication. Should a response be received, an update will be provided.

Treasury, meanwhile, noted that the bank's local currency rating remained at investment grade, in the wake of the Moody's downgrade in January. 

"The global credit rating for the Land Bank is only relevant in the case of the Land Bank issuing foreign currency, which they do not. More importantly, the Land Bank’s local currency rating remains high investment which is the only relevant credit rating for them because they only issue in local currency."

Update: This article was updated on Tuesday, April 21 to include additional comment by Treasury. 

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