The Basel Committee released its second consultative document on Revisions to the Standardised Approach for credit risk in December (comments due by 11 March 2016).
There has been little or no commentary about its impact on SME lending - we believe that the effects will be far reaching.
The committee pulled back from the penal ‘negative equity =>150% risk weighting’ approach that was previously proposed. Now they propose a general 85% risk weighting. This compares with a current 60% weighting so is still bad news for SMEs looking to raise finance from banks.
There are statements in the document about having to apply 100% risk weighting if due diligence requires it. The proposed revision to lease accounting (IFRS 16) could be a factor here.
So the future of SME lending remains in a state of flux, with the 'Big 4' IRB version yet to be released. The outcome is likely to have a major impact on SME lending by banks, especially as it affects mid-sized businesses that drive growth and jobs across Australia.
SMEs now only represent 15% of new business lending by banks and outstanding loans have fallen to 30% of all business lending (early ‘90s – 50%).
It is already quite uneconomic for banks to lend to SMEs and becoming more so. We believe that this downward trend is set to continue, as is happening globally.