There was one important question the royal commissioner (and the banks) could not answer about farm loans that were becoming a problem.
Exactly how much does a defaulted loan cost to the bank and is this reflected in what the bank charges in penalty interest?
Commissioner Kenneth Hayne said continuing to carry an impaired loan came at a cost to the bank.
‘‘Not only are there increased costs of administering the impaired loan, carrying the loan comes at a capital cost’’
Tellingly, however, Ross McNaughton of NAB could not identify the amount of the capital cost or whether there is any relationship between cost of capital as a result of impairment and a bank’s decision to charge default interest.
And in its written submissions, Westpac said it was ‘‘difficult to accurately identify the precise costs that are incurred by a bank when a loan falls into arrears’’, but that ‘‘significant additional costs are incurred’’.
Mr Hayne said: ‘‘It appears to follow that at least those banks are not readily able to compare the costs of waiting to enforce for a time with an estimate of how much more might be realised at the end of that waiting period.
‘‘And it is no answer to that conclusion to say, as NAB did in its written submissions, ‘that there is insufficient evidence presently before the commission to enable a meaningful answer to be given’ to whether default interest reflects the cost of carrying impaired loans.
‘‘Nor is it an answer to say as NAB did, that this was not a topic on which NAB was asked to provide evidence.
‘‘Mr McNaughton is NAB’s employee in charge of its Strategic Business Services unit. He could not say what the costs were.
‘‘Without knowing what those costs were he could not make a comparison of the kind identified. Without being able to make a comparison of that kind, it is not possible to make an informed commercial decision about what will be in best interests of the bank or the customer.
‘‘Those responsible for those decisions should be armed with information that enables them to make informed commercial choices,’’ Mr Hayne said.