RBA Makes Plea for Banks to Ease Approach to SME Lending

The RBA’s Christopher Kent says banks have tightened lending standards for SMEs, charging them more and imposing more restrictive terms on their loans. 

The RBA (Reserve Bank of Australia) has asked lenders to consider easing lending standards for small businesses that have been impacted by the Covid-19 pandemic.

According to RBA assistant governor Christopher Kent, small businesses play a critical role in the Australian economy and are a key source of innovation and competition. However, their future is uncertain due to their limited access to credit facilities.

“While economic conditions are improving, it has been a particularly tough year for small businesses,” Kent said, speaking to the Australian Finance Industry Association on Wednesday (17 March). “The pandemic caused the largest economic downturn in Australia since the 1930s.”

Kent says there has been little change in total SME lending over the past 12 months, in part due to the reluctance of some businesses to take on more debt in a weaker and more uncertain economic environment. In addition, many businesses have made use of government and private-sector measures designed to support their cash flows.

“Another factor weighing on lending is a more cautious approach by banks in deciding whether to finance small businesses. Much of this has reflected the application of pre-existing lending standards in a weaker economic environment,” he added. “But lending standards have also been tightened.”

“For example, banks have required a greater degree of verification of borrowers’ information, and banks have been more cautious about lending to new business customers and to the sectors hit hardest by the pandemic.”

According to Kent, lenders have been imposing tighter lending requirements on SMEs, simply rejecting SME loan applications, charging more to take on the risk, and imposing more restrictive terms on SME loans.

Around 95 percent of loans to SMEs are secured – compared with around 70 percent for large business loans – and about half of small business loans are secured by residential property, Kent says. “Many small business owners may not be well placed to provide sufficient home equity to secure a suitable loan.”

Although the government has introduced a range of measures to support business cash flows and balance sheets, the supply of finance remains tighter than before the pandemic, particularly for those businesses that were hit the hardest.

“While there are signs that conditions have started to improve a little recently, surveys of small businesses indicate that access to finance remains difficult,” Kent says.

Specifically, small businesses have noted that access to finance for start-ups is a challenge, as banks often have substantial collateral requirements, and the process for getting finance is “lengthy and onerous”.

Kent noted that over 200,000 SME borrowers arranged to defer their loan payments last year, but the vast majority of these companies have now resumed payments. Currently only 1 percent of SME loans are still on deferral terms, compared to 13 percent at the June peak.

While modelling by large banks suggests that the risk of default for small businesses relative to large businesses did not change much in 2020, the RBA expects business failures to rise as pandemic support measures are phased out.

“Our concern is that we would like to see a lift in that lending,” Kent said, noting that when businesses are treated as households, banks might tend to be much more rigorous in their lending processes. “So I think that if we can sort of make a plea to banks that they could be treating business more differently in a different frame of mind to households, then ultimately, that would be a good thing.”

Separately, the Australian Small Business and Family Enterprise Ombudsman, Bruce Billson, says he shares Kent’s concerns that banks should take a different approach to small business…