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Downturn crunches SME loans, top regulators warn
Australian Financial Review Mar 20, 2019 11.34am
Patrick Commins
Financial regulators are concerned that tighter mortgage lending standards and falling house prices are further crimping the ability of small businesses to access credit.
"Members observed that new lending to small businesses has slowed over the past year," a statement released Tuesday by the Council of Financial Regulators statement read.
"For many small businesses, personal and business finances are intermingled," the statement read. "As a consequence, the higher standards that lenders apply to personal borrowing are affecting some small business loan applications."
The CFR is the peak coordinating body for the country's most powerful financial regulators. It meets every three months and includes representatives from the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission, and Treasury and is chaired by the Reserve Bank of Australia.
Sydney house prices are now 13 per cent below their July 2017 peak, and Melbourne prices have dropped almost 10 per cent from highs achieved in November of that year, on CoreLogic data. Perth prices peaked in mid-2014 and have since fallen 18 per cent.
"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 CFR noted.
"The council will continue to monitor developments closely and stressed the importance of lenders supplying credit to small and medium-sized businesses."
The CFR members also said changes in the definition of small business in the banking code of practice as recommended by the banking commission are "significant".
The changes would widen the definition of small business and afford them with better protections, including longer notice periods should the lender choose not to renew the loan.
The council members warned that "the effects of these changes and any response to them by lenders, including small to medium-sized lenders, is still to be gauged".
Commissioner Kenneth Hayne said protections provided under the Code of Banking Practice should apply to businesses with fewer than 100 full-time-equivalent employees where they have applied for a loan of less than $5 million.
The banks have argued the loan threshold should be maintained at $3 million or risk restricting credit to business borrowers. The CFR members agreed, at least for a period of 18 months, after which time the impact of the initial changes in the code could be analysed by an independent enquiry.
"At that point, it would be appropriate to consider whether to increase the limit from $3 million to $5 million for all banks."
The CFR members also expressed the view that the $5 million limit should apply to a small business's total credit exposure, rather than an individual loan.
CFR members also said they believed the fall in house prices in Melbourne, Sydney and Perth is so far "orderly" and "does not raise material financial stability concerns.
"Overall, the future paths of housing activity and prices remain uncertain", and the council agencies "will be closely monitoring the extent of any further adjustments, and in particular the ongoing availability of credit".
That echoed comments from RBA assistant governor Michele Bullock, who in a speech on Tuesday said risks around property markets were "elevated but contained".
The council maintains that weaker demand, in particular as a result of the exodus of investors in recent years, explains the slowing in housing credit growth.
The council noted that there has been "some" tightening of credit supply over the past year as lenders responded to pressure from regulators and tightened lending criteria.
That said, and as Reserve Bank governor Philip Lowe has often repeated, "there remains strong competition for borrowers of low credit risk".
The statement also said members discussed the Reserve Bank of New Zealand’s recent proposal to significantly increase capital ratios for banks operating in New Zealand, "including the implications for the Australian parent banks", but provided no further detail.
While the CFR has been meeting on a quarterly basis for some years, this is only the second statement it has issued following a meeting.