Just in time for the much anticipated Altfi Summit in Sydney next Monday, we’ve updated our business credit stats for the latest RBA figures. A picture is worth a 1000 words.
Since 2007:
Oh and 45% has gone to ‘Other’ – time for a data rethink!
The latest figures on Business Lending from the Reserve Bank of Australiashow that only 10% of new loans in the year to September 2017 were made to SMEs, a growth rate of 4% pa.
Larger loans, mainly to corporates (although not clearly segmented by the RBA sadly), increased by 16% over the same period and accounted for 90% of new loans.
Mid-Sized Businesses got just one sentence in a 45,000 word transcript of a Roundtable Hearing in 2017 kicking off the Productivity Commission's 12 month review of 'Competition in the Australian Financial System'. It was a good sentence though!
One of the major challenges facing Australia today is the lack of a well developed financial system to support the next wave of economic growth.
The latest figures on Business Lending from the Reserve Bank of Australiashow that only 10% of new loans in the year to September 2017 were made to SMEs, a growth rate of 4% pa.
Larger loans, mainly to corporates (although not clearly segmented by the RBA sadly), increased by 16% over the same period and accounted for 90% of new loans.
Most employers of 20-199 employees (1 in 4 jobs) cannot access sufficient working capital funding (ie overdrafts) to finance expansion. Most are services/knowledge-based businesses with no real estate security to offer to a bank. As a result, once micro and small businesses become successful, they get stuck badly.
Interesting article by Christopher Joye in the AFR today calling out our policy makers for spurring on our consumer credit bubble. Businesses are left behind.
It really matters that credit should be available for business purposes to finance growth. But our system allows banks to leverage house loans 40 times compared to 'only' 10 times for an SME loan.
Our MPs 'grilled' the CEOs of the Big Banks recently, with some time spent on small business lending. They focused on just pricing rather than availability and were easily side-stepped. The show goes on.
We have heard a lot of soundbites this year about Jobs and Growth and the importance of our small businesses in delivering this. Most Australians work for a small business and most new jobs are created in this sector. However, not much has been said about getting hold of the finance to grow.
Over the last 3 years to June 2016, our banks have increased their housing related mortgage books from $1,178 billion to $1,472 billion according to the RBA and APRA. That's another $294 billion dropped into non-productive, dead assets.
Meanwhile, small business lending has increased by a miserable $26 billion, an annual rate of just 3.4%, to $269 billion over the same 3 year period - not 13-15% pa as stated by ANZ's Shayne Elliott.
Since 2013, only 11% of new business lending has gone to small businesses. Most of the $900 billion of loans outstanding to businesses goes to the big end of town.
Our economy needs finance to grow. Alternative finance or fintech is working hard to fill the very large gap but needs much more tangible support to fix the problem. There is much to do to raise awareness but also to establish standards to ensure fairness and transparency.
Australian Associated Press 4 October 2016
Commonwealth Bank senior executives have defended the interest rates they charge for small business loans, despite them being comparatively higher than they were during the 2008-2009 global financial crisis.
They admitted the bank got the pricing of such loans wrong during the GFC and were not pricing for risk appropriately.
"When the global banking system went through the experience of the global financial crisis, what we all looked at was the fact that appropriately pricing for risk has ceased to occur," CBA boss Ian Narev told the House of Representative economics committee in Canberra on Tuesday.
"Whilst conditions at the moment in terms of defaults are actually reasonably good ... we are safeguarding hundreds of billion Australia's deposit money, we must price for the risk of default over a cycle."
Mr Narev was answering questions from Liberal MP Craig Kelly who couldn't understand why the margin on business loans on average was 5.75 per cent above the RBA rate, and higher than during the GFC when economic circumstances are much improved now.
"There is a view generally because a business loan is secured by a mortgage over someone's home that therefore interest rates should be the same as the home loan, that's just not true," CBA's chief risk officer David Cohen said.
The loans were now more accurately priced given around 40 per cent of new businesses fail in their first couple of years.
The Australian 5 October 2016
Small business losses ‘increasing’
Liberal MP Craig Kelly is questioning the elevated cost of products available to small businesses. Elliott says the bank understands risks associated with small businesses that didn’t exist in the past.
“Losses in small businesses have been increasing, and they are much higher,” he says.
Hodges says banks are increasingly the scale of unsecured loans to small business, understanding many of them don’t have assets.
Elliott says lending to small business is growing at 13-15 per cent each year, but says “a lot of small businesses don’t need debt” and the bank is also helping with small business services.
“It’s not huge but I want it to be bigger. There is a transition happening in the economy ... and we want to be part of that and help those businesses set up,” he says.
“What people want is a really competitive rate, and then they want the right service proposition.”
The Australian 6 October 2016
Chairman David Coleman takes over for the last time.
The Liberal MP is back onto funding costs, forcing Hartzer to risk getting “too technical”. We don’t need that late on a Thursday afternoon.
Coleman wants reasons for the widening gap between small business loan rates relative to mortgage rates.
“It would be fair to say in the past we underestimated the loss rate (for small business loans),” Hartzer says, indicating banks are catching up on the risk differential.
“Small business loans go bad about five times more often than a home loan. And the loss rate is around 10 times. The combination of all those things have fed into that difference.”
The Westpac chief says the gap is around 1 per cent between small business loans and mortgage rates.
“It’s not a massive difference.”
Hartzer then admits small business loans had previously been “uneconomically priced and unsustainable”.
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One of the major challenges facing Australia today is the lack of a well developed financial system to support the next wave of economic growth.
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For SMEs that increasingly operating in the digital economy with operations that do not fit neatly into traditional credit risk models, difficulties in accessing debt financing can become even more acute.
Over the last 3 years to June 2016, our banks have increased their housing related mortgage books from $1,178 billion to $1,472 billion according to the RBA and APRA. That's another $294 billion dropped into non-productive, dead assets.
Meanwhile, small business lending has increased by a miserable $26 billion, an annual rate of just 3.4%, to $269 billion over the same 3 year period. Since 2013, only 11% of new business lending has gone to small businesses. Most of the $900 billion of loans outstanding to businesses goes to the big end of town.
SMEs looking to access bank funding need to have property to offer as collateral. This is a huge constraint on business growth.
Our economy needs finance to grow. Alternative finance is working hard to fill the very large gap but needs much more tangible support to fix the problem. There is much to do to raise awareness but also to establish standards to ensure fairness and transparency.
