The intention behind this Bill is to make a number of amendments to the Agricultural Credit Act, 1978, which consolidated all previous legislation relating to the ACC and is the principal legislation governing the ACC.
The 1978 Act, which confines the ACC's lending activities to the agricultural, horticultural and fisheries areas, deals with the objects, constitution, functions and financing of the ACC and with the various charges which may be taken, not just by the ACC but by other banks, on land and other property as security for loans. Before proceeding further, I would like to give Senators some background information on the ACC.
The corporation was established as a State-sponsored body in 1927 for the purpose of providing a specialised credit service to agriculture, particularly long term credit. At that time, long term credit was not readily available from the commercial banks and it was intended that the ACC would fill this gap for farmers and farm co-operatives. Until the sixties, the volume of business transacted by the ACC remained small reflecting the general economic climate of those times, the traditional reluctance of farmers to borrow and the uncertainty of market opportunities in farming.
This slow growth in ACC's business is reflected in the fact that, in 1961, ACC's total assests were only £3.7 million while annual lendings were at the modest level of £0.8 million. Growing confidence in the agricultural industry in the latter half of the sixties changed the outlook of farmers and led to an increased willingness to invest. One factor which generated this increase in confidence was the prospect of Ireland's entry into the European Economic Community, with resultant improved market conditions and an increase in agricultural incomes. This change in farming had a major impact on the ACC. Business increased and a network of district offices was established as the corporation developed to meet the new environment.
The level of ACC's annual lending rose from nearly £5 million in 1965 to just over £17 million in 1972. This growth was partly the result of two pieces of legislation. The Agricultural Credit Act, 1961, increased the authorised share capital of the ACC, raised its borrowing limit, allowed it to engage in hire purchase lending and simplified the procedures for taking land as security for loans. The Agricultural Credit Act, 1965, enabled the ACC to take deposits from the public. ACC had up to then been funded by advances and equity from the Exchequer but, as a result of this new source of funding, ACC could expand its lending without drawing on the Exchequer. Thereafter, with the impetus given to farming by EC membership, business expanded with increasing momentum. New lending in the seventies peaked in 1978 at £132 million and total assets had reached £394 million by the end of the decade.
The high interest rates which were a feature of the earlier part of this decade and the restrictions on EC market supports brought about a difficult period for agriculture. Incomes fell and the confidence of farmers was eroded. The ACC, being dependent on agriculture, also suffered. New lending business fell to a low of £85 million in 1983. While it has increased again, reaching £162 million in 1986, this increase has been accounted for by new business in the corporate food processing sector and is not due to a recovery in the demand for credit by farmers. The development of the agri-business side of its activities was the result of a commendable effort to lessen its dependence on farmer lending and to give a better balance to its loans portfolio.
High interest rates and CAP restrictions which had reduced demand for credit by farmers also affected the ability of many farmers to meet their loan repayments. This, in turn, led to a need for increased provisions against bad debts and these provision adversely affected the corporation's profitability. The bad weather of 1985 and 1986 with its serious effect on farm incomes added to the difficulties farmers had in repaying loans. The need for increased profitability for the ACC is indeed the principal reason behind the Bill at present before the House.
As Senators will be aware from the annual reports and accounts which have been laid before the Houses of the Oireachtas, ACC's reported profits in recent years have been modest. The results for 1987 are not yet available as the audit of the accounts is not yet completed. The outcome for 1987 depends on the level of bad debt provisions but preliminary indications suggest that there will be insufficient profits earned by the corporation to absorb these in full. ACC's experience in this area is not unique. Indeed, it is the norm. Banks both in Ireland and abroad have reported in recent years substantial additional provisions against their farmer loan books. Having regard to the experience of other financial institutions it is not surprising that ACC may experience a loss in 1987 bearing in mind the farm income situation, the adverse weather of 1985 and 1986 and the fact that it is a single sector bank.
I would now like to outline the main provisions in the Bill. First, it is proposed that ACC should be empowered to lend to the non-agricultural area. Secondly, it is proposed to increase from £20 million to £35 million the statutory limit on ACC's share capital. Finally, it is proposed to increase from £10 million to £25 million the limit on the amount of loans in respect of which the Minister for Finance may guarantee the corporation against losses. I will now give some more detail on each of these provisions.
Section 2 of the Bill is divided into two parts, the first of which sets out the banking activities in which the ACC may engage on a universal basis. I wish to draw particular attention to the fact that these banking activities must be for such purposes as are determined by the Minister for Finance, after consultation with the Central Bank and are subject to such conditions as the Minister considers appropriate. The provision removes the restriction, contained in section 8 (1) (a) of the 1978 Act, of ACC's lending activities to the agricultural sector. The second part of section 2 limits the amount of non-agricultural lending which the ACC may do to 25 per cent of its business with the agricultural sector, or to such lesser amount as may be determined by the Minister for Finance.
There are a number of reasons for the proposal to permit ACC to engage in non-agricultural lending. New loan business will increase profitability by reducing the corporation's dependence on the agriculture sector and giving it a better spread of business. The corporation should also become more attractive to the general public as a deposit-taking institution. At the moment, while the general public may hold deposit accounts with the corporation, the corporation is precluded from lending outside the agricultural area. The change whereby loans may be granted for non-agricultural purposes should encourage more people to open deposit accounts with the ACC. This, in turn, should have the beneficial effect of reducing ACC's cost of funds and, in time, of reducing ACC's lending rates.
ACC's move into non-agricultural lending is not without precedent. The French bank, Credit Agricole and the Dutch Rabobank provide two outstanding examples of agricultural banks which have diversified while, at the same time, retaining a first-class service to their agricultural clients.
I should emphasise that this proposed new activity by the ACC will take some time to improve profitability. It is fully accepted by all concerned that the ACC should move cautiously until adequate experience has been gained in this new area. My Department will also be monitoring the situation closely. There are, as I indicated earlier, provisions in the Bill designed to ensure that non-agricultural lending by the corporation is strictly controlled. The power of the Minister for Finance to control the amount of non-agricultural lending within the 25 per cent limit specified in this Bill and to lay down such conditions as he considers appropriate will achieve two objectives. First, it will ensure that ACC will remain primarily an agricultural bank and will, therefore, be in a position to meet the demand for agricultural credit. Secondly, it will ensure that the development of non-agricultural business will be approached with due caution.
I should add that the ACC board and management are very conscious of the need to approach the new lending venture with due care and, like them, I am confident that it will prove to be a successful venture. The agriculture sector who are and will remain the corporation's core customers can only benefit from a revitalised and stronger ACC.
The second amendment is contained in section 4 of the Bill. The extension of ACC's lending powers was the original purpose behind this Bill but, because the limit on the corporation's share capital has been reached, the opportunity is being taken to propose an increase in the limit from £20 million to £35 million to take account of growth in the corporation's business since 1978 when the £20 million limit was set.
The question of whether additional share capital will be provided for the corporation is a matter which will be judged in the light of the corporation's needs and the other competing demands for resources.
Section 5 of the Bill provides for an increase from £10 million to £25 million in the amount of loans in respect of which the Minister for Finance may guarantee the corporation against losses. This increase is being proposed because the existing limit has been reached as a result of guarantees of £4 million and £6 million given in respect of the 1984 and 1986 accounts respectively to supplement the corporation's bad debt provisions in those years. The new limit is the present equivalent of the existing limit set in 1978. I should mention that, to date, no Exchequer money has had to be paid on foot of these guarantees given to the ACC despite the fact that the company has been in existence since 1927.
In conclusion I hope I have adequately explained the purposes of this Bill. If Senators have any problems with the Bill, I shall endeavour to deal with these in my reply to the debate. I commend the Bill for the approval of the House.