John Kehoe| Australian Financial Review| 23 September 2018
Small business says it is facing a credit crunch and is blaming the royal commission into financial services for causing nervous banks to slow lending to the self-employed.
The moderation in lending to small firms in recent months appears to be an unintended consequence of anecdotal evidence of questionable bank lending practices uncovered by Kenneth Hayne’s inquiry.
The royal commission’s interim report is due to be released on Friday.
Council of Small Business of Australia chief executive Peter Strong said: “We’re hearing from our members credit from the banks is becoming much harder to get because of the royal commission.”
Fewer and smaller loans to small firms could slow economic growth.
“The proportion of small businesses that perceive it to be relatively easy to access finance has declined recently,” the RBA said in a report last week.
“Market participants have highlighted that there is a trade-off between providing more protections for small business borrowers and the willingness of banks to lend.”
Small firms have always found it challenging to access debt finance, but the problem has become more acute in recent months.
Some business bankers privately admit credit to small firms has tightened due to the royal commission’s highly legalistic interpretation of responsible lending laws, stricter loan serviceability rules enforced by the prudential regulator and weaker house prices.
Mark McKenzie, chief executive of the Australasian Convenience and Petroleum Marketers Association which represents retail service station owners, said lending had “all tightened for small business in anticipation of the findings coming out from the Royal Commission”.
“In the last three to six months, we’ve seen real tightening in access to credit for things like asset financing,” he said.
Mr McKenzie said loan-to-valuation ratios offered by banks to small firms in his sector had been slashed in half.
About a year ago, small service station operators could attain a LVR of up to 75 per cent, he said.
“At the moment no one can get an LVR over 30 per cent,” Mr McKenzie said.
The Australian Prudential Regulation Authority has been gradually tightening loan serviceability rules over recent years, forcing banks to apply tougher tests on borrowers’ income and expenses.
The royal commission has exacerbated the credit crackdown, by calling into question the legality of the Household Expenditure Measure index, a benchmark cost of living measure banks use to assess how much to lend a potential borrower.
Falling Sydney and Melbourne house prices have also contributed to slower small business credit growth and more difficulty in refinancing small business loans, bankers say.
Many small business owners use equity in their personal homes as a credit line for their firms.
A report by the RBA last week said small business credit conditions were better than just after the 2008 financial crisis, but about 20 per cent of small firms report that they have found it relatively difficult to access finance.
National Australia Bank, the only big four bank who would speak on the record about small business lending, said it had not reduced its appetite to issue loans.
“Maybe some of it is the result of banks being distracted by other things – regulatory interventions and royal commissions, but it’s certainly not the case in our business,” said NAB’s chief customer officer for business and private banking, Anthony Healy.
“We haven’t adjusted our risk appetite for SME lending as a result of the royal commission or regulatory scrutiny.”
But NAB may be an outlier, as it is growing small business lending about 1.8 times faster than major competitors.
NAB recently launched its QuickBiz digital product to offer unsecured loans of up to $100,000 or $150,000 for plant and equipment for small business.
It analyses accounting software data and bank account data to measure real-time cash flows, rather than depending on historic financial accounts and business assets.