The Farm Credit System hinders a competition for agricultural lending, a national bank consultant told rural bankers gathered here this week.

Speaking at the American Bankers Association's National Agricultural Bankers Conference, consultant Bert Ely called for the privatization of the government-sponsored lending cooperative.

With plenty of private funding sources from commercial banks, insurance companies, and private agricultural finance firms, he said, the Farm Credit System only gums up the works.

"Commercial banks and other private sector lenders can fully meet rural America's financial needs," Mr. Ely said. "I don't think in a free market you need a government-sponsored lender."

Mr. Ely said he particularly worries that the system, which was bailed out of rough financial straits by Congress in 1987, will use its growing pool of retained earnings to undercut commercial competitors.

The Farm Credit System could "really start stealing business," he said, though "it's not happening yet."

Mr. Ely, the president of an Alexandria, Va.-based bank consulting firm that bears his name, first took on the FCS in 1990, in a report that blamed "reckless lending" by the agency as the "true villain" behind the 1980s farm crisis.

In his talk on Tuesday, Mr. Ely said that though the agricultural economy is in good shape, bankers should be wary if Farm Credit System lending practices become too liberal or credit quality deteriorates.

Many attending the conference supported Mr. Ely's views and registered their own complaints about the system.

"There's no way we can fund the loans internally to match them," said David Spencer, vice president of Mercantile Trust and Savings Bank, Quincy, Ill. "They're a very aggressive lender."

Some bankers also said they fear the system will gain expanded powers and make further inroads into their business.

The ABA and the Independent Bankers Association of America are embroiled in a lawsuit over a nine-month-old rule that allows Farm Credit lenders to offer loans to farm-related businesses, like equipment manufacturers and seed sellers. The agency should only be lending to farmers, the two groups argue.

One of the few defenders of the Farm Credit System at the gathering said the lending cooperative was being unfairly painted as the enemy.

"I'm not so sure we're the bogey man," said Hubert H. Humphrey 4th, head lobbyist for Agribank, a Farm Credit association based in St. Paul. "We are competition. We make sure interest rates stay low."

Mr. Humphrey said Farm Credit banks are often the only source for long- term agricultural loans in rural communities. Besides, he said, those banks often work with community banks to make loans that the banks might not be able to make on their own.

Neil Conklin, vice president and chief economist of the Farm Credit Council, the trade association for FCS banks, said there are no plans to privatize the system. He said the system enables rates to stay competitive, particularly in remote markets. Currently, member banks have about 25% of the market share of total agricultural loans, compared to 40% for commercial banks. The rest of the loans come mainly from finance firms and insurance companies.

Rural lending in many counties in this country is nearly monopolized by local private banks, Mr. Conklin said. "You're not going to have the competitive market environment that you would have in a metropolitan area."

Ken Auer, executive vice president of government affairs for the Farm Credit Council, said Mr. Ely is wrong in asserting that member banks could offer cheaper credit than commercial banks. He said federal law prohibits the agency from undercutting private lenders. There is no evidence that such practices have occurred, he added.

Member banks are prohibited from taking deposits, but the system does use its backing as a government-sponsored enterprise to cheaply raise funds.

This angered at least one banker at the conference. "My biggest concern is their funding source," said Dan J. Messinger, vice president of the $58 million-asset Bank of Latah, in Palouse, Wash. "It really doesn't create a level playing field."

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