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Land Bank’s situation ‘complex’

The Auditor-General (AG) Disclaimer of Opinion audit outcome for Land Bank’s financial year ending 31 March 2020 Annual Financial Statements, invited a litany of commentary which wasted no time in haranguing the bank. 

Agricultural Business Chamber Chief Executive Officer, Dr John Purchase, said the situation at Land Bank was complex. 

” It was early in 2020 that the international rating agencies for the first time down-rated the Land Bank and indicated the reasons for the down-rating… Some are not of the making of the Land Bank per se, while others may well be, as indicated by the AG Report,” said Purchase. 

The AG Tsakane Maluleke said the bank’s presentation of financial statements was a growing concern, including the non-availability of sufficient appreciate audit evidence (expected credit loss), collateral and credit risk management. 

With no CEO and CFO at the helm for almost 2 years, the AG’s opinion was expected. In February 2020, Land Bank appointed Ayanda Kanana as its CEO, and a month into his role, an actuarial review of Land Bank IFR 9 ECL as at 31 March 2020 was commissioned. 

“We were requested by the Land and Agricultural Development Bank of South Africa (Land Bank) to perform an independent review with regards to adequacy of expected credit loss (ECL) provisioning for reporting purposes,” said SNG Argen Actuarial Solutions which published its report in September 2020. 

The outcomes of the review almost mirrored those of the AG except in the case where SNG Argen found the model used by Land Bank (modelling EAD, PD and LDG parameters per stage and per loan book) as ‘compliant with the principles of the IFRS 9 accounting standards’. 

At the concerning rate was Land Bank’s Service Level Agreement (SLA) business partners, who seemed to leave the bank at a lurch in terms of risk sharing. 

SNG Argen noted: “A risk sharing arrangement is in place with SLA partners whereby Land Bank is responsible for the “first loss” up to a 1st loss %, the SLA partner is then responsible for the “second loss” applicable up to the 2nd loss %, and Land Bank is again responsible for the balance of losses incurred.” 

There are over 10 SLA business partners that independently manage loans on behalf the Land Bank, who also set their own internal ‘credit policies and client management practices.’ 

It was plausible that given some SLA business partners Loss Given Default (LGD) was substantial, it inherently put the bank at a major risk financially, due to some unable to reconcile and collect on payments.

Loans were highly collateralised it seemed which had the potential to distort any ‘high level assessment of the underlying risk.’ 

SNG Agren noted: “the real financial risk in the event of any default is directly related to the recoverable amount of collateral. The accuracy of collateral valuations is therefore of critical importance in making adequate provisions.” 

The state of the bank, according to Agricultural Business Chamber, meant the bank would be unable to meet its obligations towards its investors and its clients which may have a ‘very negative systemic effect right through agriculture.’ 

“Agbiz has engaged with the CEO of Land Bank, as well as with National Treasury, at their request, and we have requested government support to stabilize the situation there,” said Purchase. 

Treasury committed R3 billion allocation in the June 2020 supplementary budget, as well as R7 billion it had earmarked for the next two years. 

The use of SLA business partners has long been questioned by some government technocrats and black farmers who raised concerns of the bank’s staff expertise, and merging with other financial institutions like Debtors Book of Capital Harvest (PTY) Ltd to provide wholesale funding to intermediaries who lend money out to smallholder farmers.

SNG Agren concluded that these intermediaries were deemed to be Land Bank’s client, “since the final client’s loans did not appear on Land Bank’s balance sheet.” 

The Land Bank was also left wanting in not fully implementing SLA models it developed in 2018/19. Only a maximum Loss Given Default (LGD) of 33% was used in 2019. If it were fully used, the SNG Agren had estimated that the bank would have increased ‘the provision by some R70 million as at 31 March 2020.’ 

Signs of recovery look distant at the Land Bank with its CEO Kanana still to publicly apprise the public on investor and organised agriculture concerns. National Treasury was expected to provide some direction in the upcoming Budget Speech. 

But the reality is that farmers were looking on grazing to greener pastures seeking alternative sources of funding. 

Purchase concurred that with the changing agricultural financial environment it was due to the state at the Land Bank which “will create opportunities for competitors and new entrants into this business of agricultural finance.”

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