Real concerns about business lending

Real concerns about business lendingANDREW WHITE AND MICHAEL BENNET THE AUSTRALIAN APRIL 05, 2014 12:00AM

THE Murray inquiry is facing calls for regulatory changes to encourage more competition, investigations of bank capital rules that deter lending to small business and whether fees and interest spreads charged to small and medium enterprises are in line with overseas markets.

Both the NSW Business Chamber and the Export Finance and Insurance Commission said the structure of regulation encouraged risk aversion by the banks and discouraged lending to small and medium enterprises.

“Funding requirements of SMEs — particularly those which are innovative or growing rapidly — do not fit into the standard criteria, or the model-based lending approach adopted by banks, given the small amounts involved and the lack of security and readily available information on borrowers’ abilities to perform,’’ EFIC said.

“Australia’s regulatory settings also bias banks against providing credit to SMEs’’.

Australian regulations require lenders to hold significantly more capital against SME loans than more “capital-light products” like residential mortgages because of the higher risk of default.

“Australian banks have a bias towards residential mortgage lending relative to SME loans in terms of capital management, but also given the extra effort in managing the resultant risks,’’ the EFIC said.

The inquiry should also investigate the different pricing charged to a borrower for a personal loan and for a business loan secured by the same property.

Business NSW said the inquiry should investigate the use of a partial credit guarantee similar to that in Britain and other countries to encourage business lending.

The concerns about business lending echo concerns expressed by the Reserve Bank of Australia about a lack of competition for business credit in Australia.

But in a joint submission with the Australian Bankers Association, the Council of Small Business of Australia played down problems of access to credit. In a study published with its submission, 11 per cent of small businesses ranked access to finance as a major concern. It was the 15th out of 20 issues highlighted.

Innovation Australia said the Australian banking sector was configured similarly to the British banking sector but more concentrated. “In the IA board’s experience, it is likewise not performing well regarding the provision of development finance,” it said.

Australia Post called for a regulatory framework that encouraged greater competition.

“Despite having one of the soundest banking systems in the world, delays to the introduction of payments, identity and financial services innovation has denied Australia potential productivity benefits and has resulted in a failure to exploit opportunities to position Australia as a leading financial services provider in the broader region,” Australia Post said in its submission.

“A regulatory framework that enables greater competition will inevitably foster innovation and greater efficiency throughout the Australian financial system.”

Retailer Coles, which has pushed aggressively into selling insurance products, said a vibrant financial system required competition.

“This, in turn, requires that new entrants are able to compete in segments of the system without being subjected to regulatory burdens beyond those needed to establish fundamental safety and soundness as well as proper conduct.”

The federal Treasury said the system was working well with regulation forged from the previous inquiry headed by businessman Stan Wallis.

It said there was no need for fundamental reforms of the regulatory framework but improvements at the margin would foster competition across the system without endangering stability.