Paying back 20% overdraft was an impossible task

Farming correspondent

Monday 9 July 2012

It seems that everyone is having a go at bankers, for reckless gambling, for misleading customers into buying unsuitable products, for their dishonesty in manipulating Libor rates, and of course their excessive, unjustifiable bonuses.

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Farming DIARY ROG WOOD

One of the effects of bad banking practices is the worry and stress suffered by those affected and the devastating impact that it can have on family relationships.

When I was a youngster the bank manager was one of the stalwarts of the local community, a man who commanded considerable respect, and welcomed to family occasions like christenings or weddings. How the mighty have fallen.

I took the tenancy of my 700-acre hill farm on the open market in 1976 at the age of 24. I was virtually penniless. My banker at the time was one of the old-fashioned type who lent more on his knowledge of the prospective borrower's character than the budgets presented to him, or the assets that he possessed. Those were also the days when local bankers still had the authority to lend substantial sums and he gave me just enough of an overdraft facility to get me started.My first few years were modestly profitable and that was to be my downfall. My old banker retired a couple of years after I started in business and was replaced by a younger, more ambitious one.After an annual review of the accounts with my new banker, we discussed the possibility of developing the farm, which was run-down and dilapidated, and taking advantage of all the new, generous UK Government and European Union grants that were available. At the end of the meeting he willingly agreed to a very substantial increase in my overdraft facility to allow me to improve the farm.Youthful naivety led me to believe that he was lending me all that extra money because he regarded me as an astute, dynamic businessman, when in reality he was merely lending money to reach the targets set by his superiors.I soon learned that it is very easy to spend money and accumulate a massive overdraft when developing a farm. What I hadn't fully appreciated was that money invested in draining land, or erecting new fences and new buildings on a rented farm couldn't be recovered by a tenant in those days. I had also yet to learn how incredibly difficult it was to pay all that money back. As a tenant farmer I had no land to offer the bank as security against my borrowings, so I had to pay 3% interest above the base rate. That became very relevant after the UK withdrew from the Exchange Rate Mechanism and base rates rocketed to 17%, leaving me paying 20% on my overdraft. Put another way, 20% interest rates force you to pay back the debt every five years and still be left with the same debt – usury!I found myself paying 20% interest on an overdraft that was well in excess of the total value of all the saleable assets in the business. In addition, I had to find the money to pay a hefty "open-market rent" from an indifferent hill farm carrying about 70 beef cows and 700 hill ewes as well as money to feed and clothe my family. I can tell you from bitter experience that was an impossible task.At the worst of my personal, financial crisis there was the worry of bankruptcy and the frustration of needlessly paying bank referral charges and excessive interest on unauthorised borrowing. The bank were ruthless and showed me no mercy.To stay within my overdraft limit I often sold cattle and sheep too early, or on to weak markets. I dread to think how much income I lost as a result of being forced to do that.Fortunately, I managed to create other income streams from agricultural journalism, company directorships and even by becoming a local councillor. Thrift and sheer hard work, by both me and my wife Carmen, enabled us to pay all that money back, but it was a very worrying and stressful time for both me and my family.Ironically, after retiring from farming I have watched helplessly as banks reduced the interest they pay me on my savings to a derisory and negligible level. Worse, I foolishly invested in Royal Bank of Scotland shares at the "bargain price" of 267p, and watched the value slide.So don't talk to me about bankers!

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Paying back 20% overdraft was an impossible task

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