Banks are under pressure to immediately stop the "despicable" practice of slapping drought-stricken farmers with hefty penalties for defaulting on their loans.
Agriculture Minister David Littleproud has demanded the banks scrap default interest charges for farmers suffering natural disasters, in line with a recommendation from Royal Commissioner Kenneth Hayne.
"It's time that despicable practice ended full stop because I don't believe the rate the banks charge reflects the actual cost to them," he said on Tuesday.
The banking royal commission has also recommended farmers should only be forced off their land as a last resort of action on loan defaults.
Commissioner Hayne's report recommended banks should only be able to call in administrators or receivers on defaulting farmers when all other avenues are exhausted.
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The inquiry heard emotional stories of farmers' problems with banks, including from some drought-stricken graziers who had been hit with hefty penalty interest for defaulting on their loans.
Mr Hayne has further recommended that only experienced agricultural bankers deal with those loans, and mediation as soon as a loan is classified as distressed.
He also wants banks to stop charging default interest when there is no realistic prospect of recovering the amount charged.
In its response, the Morrison government said it supported the banks act on the recommendations aimed at how they handled distressed agricultural loans, but would be taking no direct action.
However, it is setting up a national scheme to help farmers seek mediation to work out a way for them to repay their loans where possible.
"I've been pushing for a single national approach to farm debt mediation service for more than a year now and I'm glad to see the Treasurer will act on this recommendation and help make it a reality," Mr Littleproud said.
"It's no good having one farm debt mediation system in NSW and another one in Queensland - we need a harmonised national approach so farmers know what to expect."
National Farmers' Federation president Fiona Simson said farm businesses were heavily dependent on the banks and often faced unique and complex issues when dealing with loans.
"The recommendations are particularly salient at the moment as farmers across the eastern seaboard and Tasmania manage drought, floods and bushfires," Ms Simson said of the commission's final report.
