The major banks have assured the government they want to lend more to small business but warned the Hayne royal commission those plans could be derailed if it imposes more rigorous assessments of corporate borrowers.
Amid growing fears the banking royal commission will force banks to restrict the credit needed to grow the economy, business banking heads at National Australia Bank and Westpac Banking Corp have responded to Treasurer Josh Frydenberg by pledging to keep their doors open to SME customers as both banks urged Commissioner Kenneth Hayne not to over-regulate the space.
After Mr Frydenberg, in the AFR Weekend, urged banks to "keep open the books" and help avoid "an unnecessarily restrictive approach to credit", Anthony Healy, NAB's chief customer officer for business and private banking, said on Sunday: "We are open for business".
NAB is more willing to lend to small businesses without property security, with this accounting for more than one-third of new loans, Mr Healy said.
Treasurer Josh Frydenberg urged banks to "keep open the books" and help avoid "an unnecessarily restrictive approach to credit". Alex Ellinghausen
Meanwhile, Ganesh Chandrasekkar, general manager of SME banking at Westpac, said it stood ready to deploy an additional $30 billion – more than half its current small business loan book of $50 billion – to support SMEs.
"There is some concern from businesses that credit could tighten, but we remain entirely committed to supporting small businesses and the economy," he said.
But the commitments come as all the major banks warned late last week, in submissions on Commissioner Hayne's interim report, they won't be so willing to lend to businesses if regulation on their decisions gets much tougher.
As the recent full-year results revealed, the banks see business lending as an area of growth to counterbalance softer growth in consumer credit, given high levels of household debt and deteriorating housing markets. Over the weekend, Sydney's auction clearance rate approached a 30-year low with preliminary figures of 41 per cent despite interest rates being at record lows.
Growing risks in housing, including fears the royal commission may trigger a credit crunch, will be a core focus of the UBS Australasia Conference on Monday.
"The risk of the current credit squeeze turning into a credit crunch is real and is rising, with the housing market now falling sharply. The banking sector is facing a period of substantial and sustained earnings pressure which is likely to last several years," UBS banking analyst Jonathan Mott said ahead of his presentation to the event on Monday morning.
With bank CEOs preparing to face Commissioner Hayne from the start of next week, Mr Frydenberg said he's concerned lending across the board could tighten further after the final report is delivered.
Revealing a mixed message between the government and banking regulators, Mr Frydenberg encouraged banks to keep lending, even though lending restrictions have been required by the prudential and corporate regulators. They have been more aggressively questioning bank lending decisions, including in ASIC's case via court actions, and tougher enforcement is expected to continue next year after Commissioner Hayne criticised both regulators in his interim report for not doing enough to enforce laws.
Westpac acknowledged in its submission on the interim report that "more still needs to be done to ensure that vulnerable or potentially vulnerable customers are protected without undermining the availability of finance to customers who can afford it".
But it called for a hands-off approach on small business lending, pointing out it requires banks to "exercise a degree of expert judgment" that's more complex than consumer loans, including assessing industries, the quality of a business and market conditions.
Caveat vendor danger
If mortgage lending rules were applied to business loans, "the level of information provided and the scrutiny required in these areas would significantly increase", which could push up costs, Westpac said.
NAB said the consumer credit law "places greater emphasis on using past earnings as a means to assess servicing, whereas credit assessments for SME customers are based upon future forecast earnings. Those measures may not always be applicable to an SME customer."
Almost a year after former financial system inquiry and now AMP chairman David Murray warned in the Financial Review that "proposals which drift from caveat emptor towards caveat vendor can have profound systemic consequences", flagging the potential for the Hayne inquiry to have systemic consequences, Commonwealth Bank said the royal commission must avoid recommendations with unintended consequences.
These include "too great a shift of responsibility from borrower to lender will, [which] make it less likely that credit will be made available by the larger financial institutions or be higher priced, which will inadvertently push lending into the unregulated shadows of the financial services system," the bank said last week.
"Complicating the legal framework for SME lending with more regulation is likely to limit or constrain the circumstances in which lenders may make credit available and/or increase the cost of lending," CBA said. "This has implications for economic activity and the viability of certain businesses."
Westpac's Mr Chandrasekkar said the government could help business by reducing red tape and making laws simpler. "The administrative complexity for Australian-based businesses is real and they want greater simplification and guarantees so that they can start, grow and innovate their businesses in this competitive marketplace," he said.
Mr Healy said NAB recognise "small business is the backbone of the Australian economy, and we continue to lend to this important sector. We recognise the role we play in enabling access to credit so businesses can grow and invest. This creates jobs and opportunity and we want to be enablers of that."
CBA said it is important to recognise the fundamental activity of banking is forming a credit risk appetite and then managing that credit risk, precisely because there is an expectation that not all loans made by the bank will be repaid in full.
"If an effective guarantee of full repayment was required, it would imply an ex ante test on the viability of businesses that many borrowers would not pass – and it would significantly reduce the availability of credit and, ultimately, undermine economic growth," CBA said.
It also warned that any recommendations relating to the efficacy of guarantees as a form of security – a key area of focus in the hearings – will reduce its value to borrowers and lenders.
"If the law undermines the ability of lenders to rely on guarantees it will have the likely effect of constraining lenders' willingness to extend credit," CBA said.
Small business and finance broking groups are also behind Mr Frydenberg's calls for "great care" to be taken around further changes to responsible lending, especially as it relates to small business.
The Council of Small Business Organisations Australia and Commercial and Asset Finance Brokers Association of Australia both warned against the extension of the consumer responsible lending regime into SME lending.This article was first published by https://www.afr.com
Author: James Eyers