Small Business Financing– proposed Senate Inquiry

Sydney, 17 December, 2009: The Australian Bankers’ Association (ABA) would participate in any inquiry into small business financing because it would provide an opportunity to explain how the strength of Australian banks allowed lending to continue to the small business sector throughout the global financial crisis.

The ABA has acknowledged today’s proposal by the Leader of the Opposition, Tony Abbott, to have a Senate Inquiry into the availability and affordability of financing for the small business sector, and notes the broad scope of the proposal, which will address all sources of financing.

On availability – During the global financial crisis, Australian banks made loans to viable small businesses and continue to lend to the sector today. Banks overseas reduced lending to their business customers, but the strength and stability of the Australian banking sector enabled lending to continue, which assisted the whole of the Australian economy.

At the end of September 2009, the level of lending to businesses with loans less than $2 million was $200.6 billion.  This is slightly down from the peak of $203.4 billion reached in September 2008.
 
Banks tell the ABA that businesses are taking a cautious approach to borrowing and are paying down debt in the current environment.  There is certainly evidence of reduced demand for credit over the last 18 months, but ABA members expect that trend to reverse once the economy recovers.

On affordability –The increase in wholesale funding costs due to the global financial crisis has affected all Australian banks, forcing increases in interest rates on all lending.
 
The price of business loans, compared with home loans, is also impacted by the probability of default of business loans, and the difficulty in recovering security once a loan is in default. History has proven that small business enterprises have a higher probability of default compared with home loan customers.  This is why the Australian Prudential Regulation Authority requires banks to hold up to seven times more capital for small business loans.  A higher risk margin is required on business loans to cover the increased risk.

Reserve Bank statistics show that bank loans 90 days in arrears for unincorporated businesses are at 3.5% as at June 2009 (the most recent data available).  This compares with 0.6% for home loans.
 
On terms - The changes in the financial environment and the domestic economy have affected the cash flow of many business customers.  The current economic conditions mean that banks may require more information, covenants or new conditions if small businesses are seeking to re-finance or apply for a loan in the current environment.

David Bell, Chief Executive of the ABA, said: “It is important that banks continue to make prudent decisions on lending. Obviously it does not make business sense to lend to a customer who cannot repay the loan. We need to remember the vital role played by sound lending in restoring economic growth and we must work together to get through these difficult times.”

For further information: Heather Wellard, ABA PR. P: 02 8298 0411 M: 0409 830 439

ENDS