Thank you, Mr. Chairman.
On behalf of the Canadian Bankers Association, its 52 members and 267,000 employees, I would like to thank you very much for the invitation to speak to the committee on the subject of Growing Forward 2, with a particular emphasis on competitiveness. I am here with Peter Brown, Scotiabank; Bertrand Montel, National Bank; and David Rinneard, BMO Bank of Montreal.
We are here to answer your specific questions, so I will keep my comments brief. I will however take a couple of minutes to highlight how we support farmers in rural communities, underpin competitiveness, and promote financial sustainability through our lending, our work on Growing Forward 1—notably AgriInvest—and the importance of relationships.
Banks have a stake in seeing farmers be competitive and succeed. Our bankers, operating in roughly 2,100 rural and small town branches, live and work in the same communities, building and maintaining versatile and durable relationships with farmers. These bankers have made agriculture a priority. Seventeen percent of total funds lent to small and medium-sized enterprises by banks across the country are dedicated to the agricultural sector. That's almost one dollar in five. Our bankers also donate both their business resources and considerable personal time to support local agriculture, associations, clubs, and events. We know as much as anyone that a strong farming sector means a resilient rural community.
Agriculture, more than any other sector of the economy, experiences wide swings in business conditions. In order to help our clients be successful, banks work closely with farmers through those inevitable peaks and troughs, and our record demonstrates that we have done so. This past decade has seen farmers confront BSE, avian influenza, drought, floods, H1N1 virus, and country-of-origin labelling, and we have worked with farmers to find solutions that are sustainable, take their individual situations into account, and that are in their best interests. Sometimes this requires difficult conversations with farmers. Ultimately, however, those conversations are meant to be in the best interest: to preserve the capital and net worth of the farming operation with the objective of ensuring its sustainability. The banking industry works hard in contributing to the long-term viability of the agricultural sector and the rural communities.
For farmers who wish to increase their profitability and build their business, improving competitiveness often means adopting innovative technologies, implementing new business practices, and accessing new markets. Banks supply the tools, advice, and capital support to help farmers accomplish these objectives, while providing them with the peace of mind to support their families.
Recognizing that the family farm is still a vital part of agriculture, on the personal side we help farmers save for their children's education and for their own retirement, through personal financial planning services to help them manage their investments. Banks provide specialized advice, lines of credit, loans and mortgages, and everyday banking needs such as deposit and savings accounts. Customers in rural Canada have access to the same services and prices as customers in Canada's largest cities.
On the business side, banks provide operating and deposit accounts, insurance, investments, one-on-one interaction around the business plans, and financial advice, in addition to operating term and mortgage loans. Banks also work with producers on succession planning to ensure a viable transition to future generations of farmers. Indeed, the industry has developed customized products for succession and transfer of ownership.
I'd like to take a moment to talk about how we underpin competitiveness and promote financial sustainability through our lending. Banks are an important source of capital for agricultural producers to allow them to expand and make their operations more productive. Operating and term loans, including CALA, and mortgages allow producers to buy farm inputs such as seed or feed, purchase machinery and equipment, install green power systems, and make land or building improvements.
Lending decisions are based on an assessment of the borrower's ability to repay the loan—making decisions on an individual case-by-case basis—and based ideally on a well-thought-out business plan. These decisions are balanced with more macro conditions such as the prospects for the business sector the borrower operates in, economic prospects in general, the cost to the bank of raising funds, etc.
Canadian banks have used the same prudent lending practices and excellent risk management systems in agricultural lending as they do in every other line of business. These practices and systems have led to a banking system ranked four years in a row as the most sound in the world by World Economic Forum, and ranked first in the world for financial strength by Moody's Investors Service for two years in a row.
Experiences in other countries have shown that poor risk management is not just bad for lenders; it is bad for borrowers as well, and its negative effects extend into rural communities generally and even the broader economy. The banking system's demands of its clients of a prudent degree of risk mitigation and management is competitiveness-enhancing in and of itself. This discipline allows agricultural producers to be better positioned to deal with the difficulties in the industry and take advantage of the fact that maybe their competitors cannot.
Indeed, over the long term and consistent with our focus on prudent and responsible lending, bank credit has expanded in line with the agricultural sector's growth. Between 2001 and 2010, the provision of bank credit has been consistent with and appropriate for growth of economic output and net operating income in the sector. This largely reflects the fact that about two-thirds of bank lending is for the purposes of working and operating lines of credit. Not only is this lending linked to the level of agricultural activity, but it is also more complex than lending against assets. It requires the bank to truly understand its customers and to work closely with them over time.
The objective of Growing Forward's business risk management programs is to provide protection for different types of losses, as well as to manage cashflow. They are designed to be simple, responsive, predictable, and bankable. As banks, we encourage our clients to participate in available government programs in order to manage market risk that can lead to fluctuations in their farm income. This provides both the client and the lender with the additional level of comfort.
As banking is so heavily relationship-based, working with our clients is essential to understand what is going on with their businesses. As I mentioned a moment ago, our lending decisions are based on an assessment of the borrower's ability to repay the loan. For bankers to make a proper assessment of a business, they weigh a number of factors, including the financial health of the producer, the prospects for the business sector in which the borrower operates, economic prospects in general, and Growing Forward's BRM programs in which the farmer is participating. Not only do banks consider Growing Forward's BRM programs in their credit assessments, but banks directly administer AgriInvest and assist in developing and implementing the federal government's hog industry loan-loss reserve program, HILLRP, to restructure APP loans for hog producers. The AgriInvest program is a savings account for producers offered by banks to provide coverage for small income declines. Once an agricultural producer makes a deposit to an AgriInvest account at a bank, a matching government contribution will be credited to the producer's account.
Banks have invested a tremendous amount of time and resources to assist governments to meet their commitment of offering these savings accounts to producers. While implementing these accounts was not without difficulties, the government engaged the industry early in the process and the lines of communication were open at all times.