The New South Wales Farmers Association is lobbying the State Government to remove the interest on loans provided to farmers during drought.

Key points: The NSW Farmers Association is worried farmers are getting deeper into debt as the drought continues

The NSW Farmers Association is worried farmers are getting deeper into debt as the drought continues They want the NSW Government to drop their interest rate on drought loans from 2.5 per cent to zero

They want the NSW Government to drop their interest rate on drought loans from 2.5 per cent to zero More than $452 million has been given to farmers through the Drought Assistance Fund

The Rural Assistance Authority offers a variety of subsidies and low-interest loans under its Emergency Drought Relief Package, allowing primary producers to apply for financial assistance.

As part of the package, the $1 billion Farm Innovation Fund provides loans to farmers to improve infrastructure on properties and better prepare themselves for future droughts.

Producers can access up to $1 million in loans, with the money to be used on a variety of projects including the building of new sheds and fences, the upgrade of irrigation systems, and the refurbishing of water tanks.

Along with the Drought Assistance Fund, the scheme has proved popular, with more than $452 million in loans already handed out to 3,375 producers who have applied.

Long-term benefits

Sheep producer Hugh Taylor used the Farm Innovation Fund to renovate the shearing shed on his property near Wellington, in New South Wales.

After proving that the new shed was necessary for health and safety reasons, he began the renovations and claimed back the invoices.

He borrowed $260,000 but sees it as a long-term investment.

The Farm Innovation Fund loaned Hugh Taylor money to completely renovate a new shearing shed on his property in central west NSW. ( Supplied: Hugh Taylor )

"By spending that money I've employed local earthmovers, building contractors, plumbers and electricians," he said.

"At a time when the whole rural community is struggling, the local shearers are over the moon with it."

Mr Taylor accepted the money at a fixed 2.5 per cent interest rate on the loan but said he would be comfortable paying it.

"I'd prefer to pay interest on it, I don't expect to get something for nothing," he said.

"I know it's a huge amount of money, but I'm getting the benefit of it along with the people we've employed, so without the loans local businesses will struggle."

Call for zero interest loans

Loans provided under the Farm Innovation Fund are offered at a fixed interest rate of 2.5 per cent over 20 years and is calculated at half the NSW Treasury Bond Rate as of July 1.

However, the NSW Department of Primary Industries has waived interest on the loans for the 2018/19 and 2019/20 financial years due to the drought.

The NSW Farmers Association supports the ability for producers to borrow money, but is concerned about the risk of pushing people further into debt.

NSW Deputy Premier John Barilaro says the interest paid on State Government loans goes back into the Farm Innovation Fund. ( ABC News )

"Many farm businesses are simply unable to take on extra debt," vice-president Chris Groves said.

"The ability to borrow money to improve your farm is fine, but people need help just to keep going at the moment.

"We are working with government to look at making the loans zero interest as people need help just to pay the bills.

"Farmers need help to pay the council rates and the telephone bill [and] they'll need help to restock and plant a crop when the drought breaks."

Interest comes back into fund

NSW Deputy Premier John Barilaro said the loans offered through the fund were welcomed by the farming community, and the interest rate could be reviewed.

"As the drought continues, it's probably an area we may have to consider going forward," he said.

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He said the reason there was an interest component attached to the loans was so that money was channelled back into the fund.

"Farmers don't mind the interest rate [if] it means that into the future we can continue to provide drought support for them," Mr Barilaro said.

"That 2.5 per cent interest rate is significantly lower than the interest rate they'd pay at the bank."

Mr Barilaro said there were other loans available of up to $50,000 on seven-year terms that were interest-free.

Strong demand to borrow money

Rural financial counsellors across NSW said an increasing number of farmers are applying for loans to improve farm infrastructure.

Peter Muirhead, a counsellor for the Monaro and far south coast, said a lot of those borrowing money were using it to make long-term changes to their farms.

Farmers in the Bega Valley face the prospect of running out of water on some farms as the drought worsens in an area that is generally known for lush green pastures. ( ABC News: Adriane Reardon )

"I've had quite a few people look at exclusion fencing on their properties to keep kangaroos and deer out on the south coast," he said.

Over the past year, the workload of rural financial counsellors has increased dramatically as the drought worsens.

"I've had three or four blokes on the Monaro that are putting in what they call 'containment areas'," Mr Muirhead said.

"They are effectively setting up a mini-feedlot to maintain their stock but also give themselves options in the good times to feed animals to a certain weight."

While some farmers are exasperated at the red tape required to access the loans as well as the Federal Government's Farm Household Allowance, Mr Muirhead said the process was not too onerous at a time when farmers had been struggling to negotiate their debts with banks.

"Dealing with the banks since the Royal Commission, I've found them extremely difficult," he said.

"I think it's almost easier dealing with these government loans than dealing with the banks sometimes."