Senate backs Four Pillars, more rules on SME lending

Political pundits might like to shorten the odds of a Federal election happening sooner rather than later, with another divisive topic - what to do about small business lending - being quietly swept off the government’s table.

The Senate Economics References Committee’s report on ‘Access of Small Business to Finance’ was made public on 30 June, slipping under the radar of most of the industry, with the Big Four banks, regional, key executives and small business advocates alike making no comment.

Aside from the Australian Bankers’ Association (ABA), none had reacted to the report in time to meet our extended deadline.

Below are the key changes proposed by the Committee, as outlined in its executive summary. The full report is available here:

The Committee’s first recommendation was that banks abolish exit fees on variable-rate loans. “If banks do not do so by the end of 2010, then guidelines or regulations, or if necessary new legislation, should be used to compel them to do so,” the report said, adding: “The Committee notes evidence suggesting that larger banks may be less interested in lending to small business than are smaller banks, which prompts further concerns about the big four banks taking over smaller rivals.”

The Committee is concerned that the existing provisions of the Trade Practices Act 1974 may be insufficient to prevent further undesirable takeovers in the banking industry.

Hence, the next recommendation is that that the Government retain the 'four pillars' policy of not allowing a merger between any of the four major banks.

And further, that a moratorium be placed on approval of any further takeovers in the banking industry for one year, “unless the bank being taken over is at imminent risk of failure”.

However, as the report noted, some submissions called for some form of 'development bank' or 'rural bank' to be established, or Australia Post to be offered a banking licence, to fill perceived gaps in lending by the private banks, or for a body to be established to guarantee small business loans (as exists in some other countries). This was brushed aside in favour of increasing the amount of competition within the existing commercial banks.

Fes and charges continued to be a moot point. Steven Münchenberg, chief executive of the ABA, said: “It continues to be vital to the long-term health of the Australian economy that banks apply risk-based pricing in relation to lending to small business.”

“Throughout the global financial crisis and as we continue to experience its impacts, banks have rightly re-priced for risk over the last 12 to 18 months in relation to their small business customers,” he said.

“Banks must lend prudently. They must do this to comply with prudential regulation as well as meeting commercial objectives for their shareholders.”

Nevertheless, a balance is needed between strength and too much market power.

The Committee reiterated that the Trade Practices Act be amended to inhibit firms achieving market power through takeovers or abusing market power and that 'market power' be expressly defined so that it is less than market dominance.

No recommendation would be complete without additional red tape. Accordingly, one proposal is for the ACCC, APRA and the Reserve Bank to provide a joint annual report to parliament on competition in the retail banking market in Australia, and the provision of finance to small business, “but taking care not to increase unduly the reporting burden on financial institutions”.

The Committee also recommended that the ABA meet with small business representatives to develop a code of practice for lending to small business.

Münchenberg pointed out that the existing Code of Banking Practice covers small businesses and there are some sections in the Code which cover aspects of lending.

“The Code covers any small business that has less than 20 (full time or equivalent) people as well as a goods manufacturing business that has less than 100 (full time or equivalent) people.  It provides individuals and small businesses strong protections because when a bank adopts the Code; it becomes a binding agreement between the customer and the bank,” he said

“The ABA is currently completing some analysis to understand whether the Code does or does not cover the lending issues discussed in the report.”

AB+F comment: Lest anyone think that these recommendations could be binned in an election year, it’s informative to realise that the committee was comprised of three Liberal party senators, two from the Labor Party and strident South Australian independent Nick Xenophon.

By Bernard Kellerman  bkellerman@financialpublications.com.au
Categories
Banking
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Author:
admin, online@financialpublications.com.au
Article Posted:
July 02, 2010

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