Wellington, Jan 23 NZPA - Farm lobbyists say banks are milking farmers by charging unnecessarily high interest rates on overdrafts provided to farmers.

New Zealand's farm businesses have received only around half of the 150 basis points (1.5 percentage points) cut from the official cash rate (OCR) since December 4, Federated Farmers claimed.

"There appears to be a degree of profiteering," said Philip York, the federation's economics and commerce spokesman. "The banks are price-gouging farmers who generate most of New Zealand's export wealth. This is money being sucked out of the provincial economy."

The OCR is now 5 percent. It has been lowered from 8.25 percent since last July, and some commentators expect it to be lowered to 4 percent next Thursday. The lobby said a survey of business overdraft interest rates, conducted among members of Federated Farmers in early to mid January, showed that business overdraft interest rates have been cut by an average of just 78 basis points.

"The average overdraft rate for farm businesses is 10.40 percent, or over twice the current OCR. "That's a massive margin banks have and continue to build."

Since the current OCR easing cycle started in July 2008, farm businesses had not seen the OCR cuts reflected in their borrowings.

Dr Bollard warned financial institutions on December 4 to "do their bit", by passing on OCR savings to their customers, but Mr York said bankers seemed to interpret this as meaning their retail, rather than business customers. Overdraft arrangements provided vital working liquidity to small and medium sized enterprises, and farmers with seasonal fluctuations in income depended on them to pay bills throughout the balance of the year. "The banks are literally farming the farmers to keep their profits high," said Mr York.

Farming was relatively low risk but the banks had still built up fat margins, he said.

With the last cut in the OCR bank margins had grown by 72 basis points alone and that was affecting the nation's economic recovery. By not passing on OCR savings to business customers, banks were putting a brake on the ability of businesses to retain profit, reduce debt and retain staff. "A rocket needs to be put under the banks to get these critical business overdraft rates down," Mr York said. Westpac's head of agribusiness, Dave Jones, said farmers were benefiting from fixed lending rates, which are lower than the seasonal overdraft funding.

Banks did their best to hold rates as long as possible when interest rates rose and were now trying to recover some of that margin.

He said fewer than 20 percent of loan balances were on floating interest rates.

Although base funding appeared cheap there was a funding gap within banks -- the difference between what was lent and generated in the local market to enable that lending -- which was funded at a large premium via offshore means, Mr Jones said.

The credit crunch meant risk had been repriced internationally.

A senior economist at UBS, Robin Clements, said banks faced far greater difficulty in securing funding internationally when banks and financial institutions were unwilling to lend to each other,

A big rural lender, National Bank, also said it was operating against a backdrop of an "unprecedented global credit crisis," and the official interest rate was only one component in setting lending rates.

Spokeswoman Virginia Stracey-Clitherow said wholesale money market rates had increased dramatically in the past year .

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