The NAB has admitted it allowed a Queensland grazier's debt to balloon to $7.8 million from $3.3 million by imposing punitive default payments over several years of drought and crashing prices.

Key points: Queensland graziers saw their debt more than double having to pay punitive default rates of up to 19pc through years of drought and poor cattle prices

Queensland graziers saw their debt more than double having to pay punitive default rates of up to 19pc through years of drought and poor cattle prices NAB concedes such rates were not in the interest of the bank or its customers

NAB concedes such rates were not in the interest of the bank or its customers Queensland graziers told if they didn't sign up to the deal they would walk out with just the shirts on their backs

The bank and financial service royal commission heard the Smith family from Hughenden, 370 kilometres west of Townsville were paying interest rates of up to 18.9 per cent on loans and overdrafts they could never repay.

The commission used the case of Ken and Deborah Smith to highlight the impossibility many farmers have escaping the trap of high debt when hit by natural disasters.

The Smiths originally financed two farms through NAB in 2011 with a $3.1 million loan and $250,000 overdraft for costs.

However, soon after drought set in at the same time as cattle prices in Queensland collapsed and the live export trade was banned.

Several years on, the drought has barely abated despite one of two properties being hit by a flash flood from well upstream and the debt continued to mount.

The original overdraft has blown out to $1.785 million.

The first $530,000 incurs an interest rate of 10.92 per cent but the bulk is charged at an even higher default rate of 18.9 per cent.

The original $3.1 million was charged at 13.2 per cent and has led to a current balance of just under $6 million.

The default rates have been in place since March 2013 since the Smiths agreed to a debt remediation process at a meeting with a bank official.

NAB executive Ross McNaughton said he was not surprised no one informed Ms Smith about the bank's hardship processes.

He said on review of the file the case was not just about hardship, but also business viability.

Ms Smith said she was told by her NAB banker if she and husband Ken did not sign a debt remediation process, "we would walk out [of the meeting] with nothing but the clothes on our backs".

Grazier and NAB customer Deborah Smith was given 6 months to repay $800,000 in the midst of a protracted drought and low cattle prices. ( Supplied: Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry )

At the 2013 meeting, NAB demanded the Smiths sell one of two properties it held mortgages over, as well as cattle, and repay $800,000 of a $3.1 million debt by the middle of 2014.

At the time the Smiths' primary property at Hughenden had been in drought for two years and cattle prices had collapsed further after having not recovered from the banning of live cattle exports in 2011.

Ms Smith said the "deed of forbearance" drawn up by the bank would have needed substantial rain to have fallen and the cattle to fatten over six months to be realistic.

"It would have taken a super year," Ms Smith said.

In the event no rain fell and both properties were seriously in drought by the end of 2014 when the Smiths had only been able to repay less than $30,000 of the debt.

By 2017 rain still hadn't arrived in the area, and no buyers could be found for the Hughenden property and the cattle were in no condition to be sold.

The parched farms near Hughenden. ( ABC News: Allyson Horn )

Ms Smith said it would take several years of just average rainfall for properties to recover.

"You need as many years of average seasons as years of drought," she said.

The property remains unsold and the Smiths have been wracking up default repayment penalties on loans and a mounting overdraft for more than four years.

"It is very stressful … we'd still like to sell one of the properties and clear the debt and refinance," Ms Smith told the commission.

Counsel assisting the commission Mark Costello asked Mr McNaughton if with the benefit of hindsight the application of the penalty to the overdraft had been to the detriment to both the Smiths and the bank.

"Yes I do," Mr Naughton said. "Is that the appropriate way to address it, to take it to farm debt mediation by serving a notice on the farmer that says the bank is considering selling the secured property, which is also their home?" Mr Costello asked. "Not in itself, no," Mr McNaughton responded.

Mr McNaughton said it had become common practice in Australia for banks to charge default rates as an incentive to keep borrowers to the terms of the loan.

Mr Costello asked how it could be an incentive to pay when in the case of the Smiths there was no capacity to pay.