Council of Financial Regulators rejects Hayne small business recommendation

MICHAEL RODDAN
MARCH 20, 2019
The Australian

A royal commission recommendation to extend protection for small business borrowers is all but dead in the water after the powerful Council of Financial Regulators warned that adopting the measure could further constrain credit to small and medium enterprises amid a sliding housing market.
In the minutes from its latest quarterly meeting, the CFR, which takes in senior members from Treasury, the Reserve Bank, the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission, noted it “supported maintaining the current borrowing threshold” to define small business out of fear that adopting financial services royal commissioner Kenneth Hayne’s recommendation could worsen “the tightening in credit conditions that has taken place”.
The Australian Banking Association recently baulked at taking on the royal commission recommendation to broaden the current definition of a small business of a company with fewer than 100 employees and total credit facilities of $3m to one in which the definition covers any small business loans of less than $5m.
Changing the definition in the sector’s mandatory Code of Conduct would extend protection afforded to family enterprises under the sector’s Banking Code of Conduct to up to 20,000 more businesses. These include simplified contracts and fewer burdensome loan conditions.
However, concerns have been raised by the sector that doing so would mean banks would be less willing to lend to small businesses because they would lose legal privileges. It’s also been argued that it would lead to higher loan rates being charged to SMEs.
The CFR said changes to the Code of Conduct, ushered in by an independent review — which also recommended the increases threshold for small business that failed to be adopted — were already “significant” and backed another independent review in 18 months time to see whether the threshold could be raised.
“This would allow time for sufficient information to be gathered on the effects of the initial changes and the potential effects of the changes in the small business definition recommended by the royal commission. At that point it would be appropriate to consider whether to increase the limit from $3 million to $5 million for all banks,” the minutes said.
“Members expressed a view that a limit based on total credit exposures is more appropriate than one based on loan size.”
Since the global financial crisis, interest rates charged to small businesses have skyrocketed. In 2007, the interest rate spread on small business debt — the difference between what it cost the banks to fund the loans against the price borrowers were charged — was about 200 basis points. From 2008, this blew out to around 400 basis points and remained there.
In Australia, the four major banks — Commonwealth Bank, Westpac, ANZ and National Australia Bank — control 80 per cent of the SME market.
Last week, NAB — the biggest Australian business lender — said it backed the royal commission recommendation.
APRA has concerns that there may be less appetite among Australian lenders for small business loans than there may be for other types of lending, due to the capital restrictions placed on the banks and the use of residential property as equity for loans.
“Members observed that new lending to small businesses has slowed over the past year,” the CFR minutes said. “For many small businesses, personal and business finances are intermingled. As a consequence, the higher standards that lenders apply to personal borrowing are affecting some small business loan applications. Further falls in housing prices could constrain small business borrowing, given that around half of loans to unincorporated businesses are secured by residential property. The Council will continue to monitor developments closely and stressed the importance of lenders supplying credit to small and medium-sized businesses.”
The CFR said it would be monitoring further falls in house prices across the nation.
“Despite historically high household debt, signs of financial stress remain relatively contained given a strong labour market and low interest rates. The Council noted that while mortgage arrears rates remain low, they have reached a post-financial crisis high. This largely reflects regional conditions. Overall, the future paths of housing activity and prices remain uncertain.”