Farm Credit Banks on Rebound After Money Woes : Agriculture: In the ‘80s, system was near collapse. But consolidation and reorganization turned it around--so much so that Omaha bank offered to let flood victims halt payments for a year.

When record rainfall and flooding hit the Midwest last summer, the Farm Credit Bank of Omaha proposed to let its 20,000 borrowers in the disaster area off the hook.

The customers in Iowa, Nebraska and South Dakota could defer paying their real estate loans for a year.

No member of the Farm Credit system could have made that offer in the mid-1980s. The network of borrower-owned institutions was near collapse as the farm economy went through a shakedown.

But seven years into its government-engineered rescue plan, the system is about to announce 1993 earnings that could hit $1 billion. In 1985 and 1986, the government-chartered lenders in the system had lost $5 billion in bad loans.

With fewer and more tightly supervised banks, the system has also repaid virtually all the $1.3 billion it borrowed, more than nine years ahead of schedule.

Members of Congress who helped engineer the recovery say it worked without costing taxpayers. Nor did the government become a major landlord, as in the much larger savings and loan bailout.

“If there was ever the case where the government did something that worked and worked extremely well, it’s with the farm credit system,” said Sen. Kent Conrad (D-N.D.), chairman of the Senate Agriculture subcommittee on credit.

The system cut its overhead, merging 36 farmer lending banks into 11, and nearly 1,000 local lending associations into 238. It allowed borrowers to defer payments and cut their interest rates.

The system’s network of lending banks for farm and utility cooperatives also shrank from 12 to three.

Now the system wants to find ways to make more business, agricultural export, real estate and utility loans. Its leaders contend that a system that began in 1916 to aid producers needs to keep up with fundamental changes in rural America.

The Clinton Administration is looking at ways to help the rural economy with more spending on housing, water treatment and sewage systems, giving the system more room to ask for a stronger presence.

But commercial bankers are fighting the push. They argue that the Farm Credit system shouldn’t benefit from special government treatment and risk taxpayer money to compete with private institutions.

“We’re all for their doing well, but we think they should be staying within their charter,” said Ed Alwood, spokesman for the American Bankers Assn. “We remain unconvinced that there’s a need out there that the banks are not meeting.”

The farm economy has recovered since the 1980s, when a collapse in commodity prices depressed the value of land used to secure loans. Private banks have been reporting record profits too, but there’s a shrinking pool of traditional farm borrowers.

The private banks took away farm credit customers in the 1980s when the system had to pay more to borrow than it could charge customers. It lends to about one-fourth of agriculture borrowers now, compared with more than a third just 10 years ago.

Now, low interest rates favor the system, which sells bonds at just a smidgen above the low Treasury rate. There are no depositors.

Although the securities aren’t really backed by the government, some federal guarantee is implied. Some favorable tax treatment and the highest rating, AAA, by Moody’s Investor Service Inc. have helped.

Still, there are some lingering soft spots. About 4% of its $53.3 billion in loans are in a “non-performing” or troubled category. And the General Accounting Office recently reported that some banks can lend too much to too few borrowers, creating risks.

But being picky may be what helped the Omaha bank make its offer to flood victims. Disaster aid and high prices for surplus crops helped many growers through the bad year.

Still, only 1,000 of the 20,000 eligible borrowers asked to take advantage of the reprieve.

“The quality of the portfolio is like gang busters,” said spokesman John Scherle. “They’ve got the assets and the wherewithal to handle the year without taking too big of a hit.”