The tiniest farm bank in Kansas can tap New York's financial markets -- in large part because of the growing internationalization of the banking industry.
The New York subsidiary of Rabobank -- a $40 billion Dutch cooperative bank -- will buy loan participations in increments as small as $25,000 from agricultural banks. Rabobank will buy up to 80 percent of a loan. The local bank keeps the remaining 20 percent and also collects the interest and principal from the borrower -- who may or may not know that part of the loan has been sold.
The Rabobank program can often increase a bank's profit on a loan -- if the rate Rabobank charges is less than the rate the farm bank is charging the borrower. The program also can increase the amount of funds a local bank can use to lend to its community because it removes loans -- and therefore frees up deposits that back those loans -- from a bank's books.
The Rabobank operation is coordinated by MABSCO Agricultural Services Inc. (MASI), a nonprofit financial middleman that is owned by a joint-venture of 12 state bankers associations in the heart of the country.
About 120 farm banks have joined the MASI program in the two years it has been operational and have sold $40 million of loans to Rabobank. Rabobank has committed itself to buy up to $150 million of farm loans.
At present, only seasonal loans to finance a farmer's yearly crop production are eligible, but MASI officials expect to offer a longer-term purchase program for real estate loans.
MASI President Leslie W. Peterson -- who is also is president of Farmers State Bank in Trimont, Minn. -- said MASI looked long and hard for a U.S. money center bank that would buy loans in small enough increments to be useful for farm banks. But Peterson said the giant U.S. banks were not interested in increments of less than $1 million.
MASI is the brainchild of Peterson, Edward L. Tubbs, chairman of Iowa's Maquoketa State Bank, and retired Bank of America Senior Vice President Walter W. Minger. Rabobank will only buy "solid" loans that meet credit standards set down by the Dutch institution -- which makes 90 percent of the agricultural loans in the Netherlands and holds 40 percent of that country's deposits.
It costs a bank a minimum of $5,000 and a maximum of $14,750 to join MASI. The assessment is based on the bank's asset-size. Banks in 14 states are eligible now and Indiana banks may be able to join soon.
Because Rabobank has access to domestic money markets (one concern of farm bankers is that the funds are "foreign"), it often can obtain funds far more cheaply than the originating bank.
Currently, farm banks are charging their customers about 14 percent for a crop loan. Rabobank recently quoted banks an interest rate of 12.4 percent for a one-year participation in a loan.
A bank that sold 80 percent of a $100,000 loan to Rabobank would pay the Dutch bank $9,920 in interest. But the bank would collect $11,200 from the farm customer -- increasing its earnings on the loan by about $1,280. The bank, knowing it can sell a loan through MASI to Rabobank, might also reduce its borrowing charges to the farm customer. One of the major difficulties faced by farmers is high interest rates.
For a 30-day participation, Rabobank recently charged 11.2 percent, while it charged 11.65 percent for a six-month participation. At the end of the participation, Rabobank sells the loan back to the originating bank.
Peterson said MASI and Rabobank are introducing a program to permit banks with excess deposits to invest those funds at slightly higher rates than generally are available to small banks.