Default interest on distressed farm loans used as 'bargaining chip'

Default interest on distressed loans is being used by banks as a "bargaining chip" to convince farmers to quickly sell off their assets, the royal commission interim report suggests.

Default interest grew quickly, with the balance owing ballooning when a borrower could make no substantial repayment to reduce principal or interest, the report said.

"It seems not uncommon for a bank to use default interest as a bargaining chip to persuade the borrower to agree to prompt, sometimes immediate, realisation of the securities," it said.

The report also questioned what commercial purpose a bank achieved by continuing to charge default interest when the balance of a farm loan outstripped "the likely worth of the security property".

On the vexed issue of farm debt mediation, it said there was an "obvious advantage" to taking a national approach via a common legislative scheme.