* Largest rural lender drops default interest charges in droughts
* Farm lending in spotlight of powerful banking inquiry
* Severe drought grips Australia's cropping and pasturelands (Adds farmer's quote, NAB shares)
By Tom Westbrook
SYDNEY, July 24 (Reuters) - National Australia Bank NAB.AX moved to soothe public anger after a major inquiry showed it dealt harshly with rural borrowers, saying it won't penalise farmers for loan defaults in droughts amid a record dry spell in parts of the nation.
Farm banking in hot, dusty Australia has long been tough and although it is a small component of overall books, rural loans are some of the riskiest and most politically sensitive.
That has made it a lighting rod for criticism as the worst drought in living memory sweeps over parts of eastern Australia at the same time as a quasi-judicial Royal Commission probes misdeeds in the banking sector. move, which also includes offering access to discounted loans to farmers, is the latest from banks scrambling to reform their own practices ahead of expected recommendations for stricter regulation of the sector. Royal Commission and other inquiries reveal that in some cases we have lost touch," NAB Chief Executive Officer Andrew Thorburn said in speech on Monday evening in the rural town of Wagga Wagga.
The bank, Australia's largest rural lender, would no longer levy default interest if drought put borrowers behind on repayments and added that farmers who make deposits could also access money at discounted interest rates, he said.
DROUGHT
The relief comes as winter rain across much of eastern Australia has gone missing, with rainfall levels at or near record lows across vast tracts of the country.
Production of wheat, Australia's largest rural export, is set to fall to an eight-year low this season and graziers are killing cattle and sheep by the thousand lest they starve to death. the banks could hold off on pushing people (and the government helped) we wouldn't be half as bad off, really," Ash Whitney, 58, told Reuters from his cattle property 330 kilometres (205 miles) northwest of Sydney.
The drought has hit fertiliser and pesticide maker Nufarm Ltd NUF.AX , which slashed earnings guidance on Monday as demand fell, while the country's biggest bulk grain hander, Graincorp Ltd GNC.AX , made a profit warning in May. think it's the driest spell we've ever had," said Tom Woolaston, 70, who is the fifth generation of his family to raise sheep at Stratharlie, near the town of Tamworth in western New South Wales state.
BIG BANKS
For farmers, already disillusioned after years of watching city executives shutting local bank branches, the drought has brought closer to home the financial industry misconduct emerging from the Royal Commission.
The commission heard in June how NAB charged a cattle-farming couple in Queensland more than A$2.6 million ($2 million) in default interest alone after flooding rain followed by drought pushed them into arrears on a A$3.1 million loan.
It has also uncovered poor lending practices, found problems with cross-selling financial advice and altogether wiped more than $20 billion from the sector's share prices.
NAB shares rose 0.2 percent on Tuesday, as the broader market .AXJO also gained. NAB shares have shed nearly 5 percent so far this year.
Lenders have already rolled out customer-friendly initiatives like cutting ATM fees and more moves like NAB's are surely coming, said CLSA banking analyst Brian Johnson, who added that banks already offer hardship provisions.
"The flipside is if all of this basically increases the risk retention to the bank, other things being equal, you would expect to see the rate move up a little. No-one gets a free ride."
($1 = 1.3550 Australian dollars)