News: NAB National Australia Bank drops default penalties for drought-hit farmers

• 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

SYDNEY, July 24 (Reuters) - National Australia Bank (NAB) will stop charging farmers extra for defaulting on loans in droughts, its chief executive said, after a major inquiry heard the lender heaped pressure on rural borrowers and as remarkably dry weather grips the country.

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.

NAB's move, which also includes offering access to discount loans to farmers, is the latest from banks scrambling to tighten lending and reform their own practices ahead of expected recommendations for stricter regulation of the sector.

"The Royal Commission and other inquiries reveal that in some cases we have lost touch," NAB Chief Executive Officer Andrew Thorburn said at speech on Monday evening in the rural town of Wagga Wagga.

The bank, which is Australia's largest rural lender, would no longer levy default interest if drought put borrowers behind on repayments and added that farmers could also access money at discounted interest rates, he said.

Production of wheat, Australia's largest rural export, is set to fall to an eight-year low this season, owing to near record low rainfall, while graziers are killing cattle and sheep by the thousand lest they starve to death.

Fertiliser and pesticide maker Nufarm Ltd (NUF) slashed earnings guidance on Monday as the dry cut demand, while the country's biggest bulk grain hander, Graincorp Ltd (GNC) , made a profit warning in May.

The Royal Commission's revelations of financial industry misconduct, which have shredded trust and the share prices of Australia's big banks, have also thrown into sharp relief rural concerns that bankers are out of touch.

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. ($1 = 1.3550 Australian dollars)