Farmers Turn to Commercial Banks as South African Lender Stalls

(Bloomberg) -- South African farmers are increasingly turning to commercial lenders to top up their working capital as the Land and Agricultural Development Bank battles a liquidity crisis.

The Land Bank, which supplies about 30% of loans in the agricultural industry, missed a loan repayment in April that triggered a cross-default provision in some of its bonds. As the state-owned lender works with its funders and National Treasury to restore its financial affairs, farmers are looking elsewhere.

“Some Land Bank clients are adopting a proactive approach in exploring new financial partners as they do not want to wait until the last moment,” said John Hudson, the head of agriculture at Johannesburg-based Nedbank Group's business-banking unit. “Some are starting to test the water, whereas others are certainly being far more direct and saying ‘we want to move.'”

The country's largest commercial lender to the sector, Absa Group, has started extending working-capital facilities to clients its shares with the Land Bank, as farmers are unable to access pre-approved funds from the state-owned company.

“For us, at the moment, the critical piece is to make sure there is working capital available to make sure these farms get production finance to plant for the next season,” said Abrie Rautenbach, the head of Absa's agribusiness unit. “So that the factory keeps on operating.”

Trouble at the Land Bank comes as the agricultural industry grapples with the fallout from the coronavirus pandemic on some of its infrastructure and suppliers. It also follows persistent droughts over the past five years that has curbed the ability of farmers to repay loans. While food production remained essential in South Africa under restrictions to curb the spread of the virus, non-food sectors suffered.

All Options

Commercial banks have all extended relief to farmers hit by Covid-19 on a case-by-case basis. The lockdown also means lenders are seeking new ways to solve their clients' problems, such as the use of satellite imaging and drones to monitor crops, said Standard Bank Group's agriculture business head Nico Groenewald.

The Land Bank -- which last month appointed FirstRand Ltd.'s Rand Merchant Bank as corporate finance adviser to recommend ways to strengthen it's balance sheet -- will take all options into account, a representative of the lender said by email. It has already asked funders for an urgent liquidity facility of 3 billion rand ($175 million), which will be guaranteed by the state.

Read More: South Africa's Land Bank Needs $1.2 Billion Injection

If the Land Bank's woes are not resolved, much is at stake, said Nedbank's Hudson, as the firm extends financing to small farmers that do not meet the lending criteria at private-sector banks.

“I am sure all the banks will agree, that we need a strong Land Bank with a clear mandate,” he said. “They remain a vital component in building a sustainable inclusive agriculture sector.”