National Australia Bank has allowed the owner of a drought-hit Queensland cattle farm to keep the property despite not making repayments for more than five years, but denies they've done so because of concern about the political fallout.
Both NAB and Australia's biggest bank the Commonwealth Bank have been worried about the impact of their reputation if they move against struggling farmers, documents uncovered at the banking royal commission show.
Senior NAB executive Ross McNaughton denied a concern to protect the bank's reputation drove enforcement decisions, but admitted it was one consideration.
A 2014 internal email revealed NAB did not want to appoint receivers to north Queensland graziers Deborah and Ken Smith's properties because of the drought and political environment.
Even if it waited for it to rain and then appointed receivers, "the ultimate political consequences will be severe".
A 2017 email from the NAB staffer who manages the Smiths' file again noted the difficulty in taking enforcement action because it might damage the bank's reputation.
The manager noted the bank had virtually no chance of recovering its full debt - including millions of dollars in penalty interest - "as a result of the politics stemming from the five-year drought and the potential impact on bank image".
Mr McNaughton, who heads the NAB division dealing with stressed or defaulted business loans, said the bank wanted to be repaid but wanted the Smiths to remain on the farm.
He did not believe political and image concerns dictated its decision not to take enforcement action.
"I'm aware that there have been other enforcement actions for other customers, and the fact that in this case enforcement action hasn't been taken, isn't to my mind because of solely political motivation," he said on Friday.
The Smiths have been in default on their loans since 2012 after being hit by the long-running drought and a slump in cattle prices after the Australian government's 2011 ban on the export of live cattle to Indonesia.
The bank has asked the Smiths to return to farm debt mediation, although they were unable to sell stock and a property to meet a 2013 agreement under which NAB would waive the default interest.
The inquiry also heard the Commonwealth Bank was keen to protect its reputation when dealing with farmers.
A document outlining its approach to farm debt mediation noted a farmer's plight could attract the sympathy and attention of the Australian public, media and political parties and "our brand can be at risk".
"Therefore it is incumbent on the bank to handle such matters with integrity and compassion (which doesn't mean we give them more money) to ensure we do the right thing and our brand is protected. Agreements through farm debt mediation helps achieve this."
Commissioner Kenneth Hayne QC is considering whether to take any action against CBA after it failed to produce all documents about a former bank manager who engaged in misconduct, having found more overnight.
A CBA board member was briefed about the issues with the banker working for its Bankwest subsidiary, the inquiry heard.