No challenge to big banks

Instead of being sensitive to the individual circumstances of a small business, banks are applying the revised criteria universally and brutally

A Senate committee has just put out a report about small business access to finance.

If you missed it, don’t feel bad. The media has barely mentioned it. This is not a comment on the news priorities of journalists and editors (at least, not on this occasion; mainstream newspapers and television stations are erratic, at best, and neglectful, at worst, in their small-business coverage).

Instead, it is reflects the lack of news to report in the report.

Over five months, the economics references committee received 52 submissions, held two public hearings in Sydney and Canberra, and filled over 100 pages on the subject.

But when it came to making policy recommendations, the committee came up with just six.

And only one of these recommendations – to ban exit fees on some small business loans – would be of any practical consequence if implemented, and only then for borrowers with variable-rate (as opposed to fixed-rate) loans.

The weakness of its recommendations is in inverse proportion to the strength of the problem uncovered by the committee.

Bank lending to small businesses has slowed in the wake of the global financial crisis. This is an inevitable consequence of falling sales (and so less cashflow with which to service loans) and a bleaker economic outlook (and so fewer investment opportunities).

But as the committee notes, the big banks are also choosier about to whom they will lend post-crisis. They have tightened the criteria by which they assess loan applications. But instead of being sensitive to the individual circumstances of a small business, banks are applying the revised criteria universally and brutally.

Among the casualties are profitable businesses with reliable cashflows that proved their mettle by prospering through the downturn.

The Finance Brokers Association of Australia, which represents business-loan brokers, even reports instances of banks taking away the credit facilities of existing customers simply because the value of the asset those facilities are secured against has fallen below an arbitrary threshold.

For those small-business operators still able to borrow, the cost of doing so, in terms of both interest rates and fees, has risen.

“These developments”, the committee says, “are reflections of competition for lending to small business having diminished.

“Important drivers of this include bank mergers and the difficulties faced by non-bank competitors. While some of this diminution in competition is related to the global financial crisis, and so should be temporary, the impact of structural changes such as mergers will be long-lasting,” it says.

In other words, don’t hold you breath for things to improve any time soon, all other things being equal.

But the point of a parliamentary inquiry, indeed a parliament, is that “other things” don’t have to be equal. Which is the economics committee’s recommendation are so disappointing.

It treats the dominance of the major banks as part of the natural order. All it can offer are ways to stop that dominance increasing, by stopping further acquisitions like Commonwealth Bank of Australia’s purchase on BankWest in the depths of the crisis.

But when the big four banks and their subsidiaries already write nine in 10 small business loans between them, these are recommendations of no practical consequence. After all, what do CBA, National Australia Bank, ANZ Banking Group and Westpac Banking Corporation have left to acquire?

The competition watchdog, the Australian Competition and Consumer Commission, needs the power that American regulators already have to break up over-mighty companies such as the big banks.

Sure, non-bank competitors will trickle back into the market over time, as the committee suggests, but they will never seriously challenge the pricing power of the big banks.

This will require them to be not-so “big”. The Senate inquiry, like so many of good intention before it, has failed to challenge the big banks and so failed to do anything to open up the market for small business lending in this country.

BRW

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