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Chapter 5
Finance for regional SMEs
5.1
The committee was asked to make a 'comparison between the credit options
available to SMEs located in regional Australia and metropolitan areas.'
5.2
Treasury reports that between June 2007 and September 2010, 'the stock
of outstanding credit to SMEs in the agricultural sector increased in nominal
terms by around 75 per cent between September 2009 and September 2010'.
Comparatively, for the same period the stock of outstanding credit for SMEs in
other sectors increased approximately 85 per cent.[1]
Figure 5.1 Stock of outstanding credit[2]
![Figure 5.1 Stock of outstanding credit[2]](/~/media/wopapub/senate/committee/corporations_ctte/completed_inquiries/2010_13/sme_finance/report/c05_1_gif.ashx)
5.3
Treasury further reported that credit outstanding to SMEs in the
agricultural sector rose by approximately 8 percent from June 2007 to September
2010, compared with a 7 per cent growth across other SME sectors.[3]
5.4
None of the ADIs presenting evidence to the inquiry informed the
committee that their lending policies differed between SMEs in regional and
rural areas and SMEs in metropolitan areas. ANZ and NAB stated that the same
lending polices applied to rural and regional SMEs and SMEs in metropolitan
areas.[4]
5.5
In addition to finance that does not differentiate between industries,
rural and regional SME may have access to financial products tailored to the
agribusiness sector. ANZ, BankSA, BankWest, CBA, NAB and Westpac are among the
providers of 'agri banks' specialising in loans to rural SMEs.[5]
ANZ stated that its Regional Commercial Banking service offers many of the
mainstream SME products and services, as well as 'specific products for farming
business.'[6]
Westpac Group explained that '[a]gribusiness lending products and bankers focus
almost exclusively on the specialised lending needs of agricultural-based
businesses.'[7]
5.6
Data from Canstar Cannex indicates that there are approximately 69
agribusiness finance options from nine 'agri banks' (Appendix 5). The kinds of
finance available include residentially secured business overdrafts,
residential secured variable business loans and commercially secured variable business
loans. The interest rates for agribusiness loans are in most cases comparable
to the interest rates attached to mainstream business loans. For example, one
bank's commercially secured variable business loan has an interest rate of 7.94
to 9.74, which is the same as the interest rates applying to the equivalent
agribusiness product. However, agribusiness products may also attract a higher
interest rate. For example, the interest rate for one bank's residentially
secured agribusiness overdraft is slightly higher than the equivalent mainstream
business overdraft. The residentially secured business overdraft has an
interest rate of is 9.81 per cent while the rate for the agribusiness
residentially secured business overdraft varies from 9.81 per cent to 11.71 per
cent.
5.7
The committee did not receive evidence that clearly indicated a lack of banking
competition in regional areas. It did hear that there had been a move out of
regional banking in the past, but that there were signs of that trend being
reversed.[8]
ANZ stated:
We believe that, despite the retreat of some finance
providers during the GFC, the market for small business banking remains
competitive with a range of lending and deposit products targeting this segment
across both metropolitan and regional geographies.[9]
5.8
The ABA argued:
We are seeing, particularly in regional and rural areas, more
and more of the decision making being devolved down to people in the branches
or the subregional managers for the very reason that they are the people who
can make the soundest judgments about what is going on in that region.[10]
5.9
In some regional markets, individual lenders – often mutuals rather than
major banks – may have a strong presence:
We have at least two regional members where almost a third of
their lending is commercial, which is highly unusual. It just goes to show that
in those regional markets they are very well established, they know those
markets very well.[11]
5.10
Overall, the mutual sector is particularly well-represented in regional
Australia:
Mr Lawler—I think the fact that we have such a big footprint
in regional Australia reflects the fact that there is demand for institutions,
and historically there has been demand for institutions like ours. People want
to have access to banking services. They want to be able to retain their
capital locally. They want to be able to speak to lenders who understand them,
understand their business and understand the local community.[12]
5.11
There are also intermediaries, such as brokers, stepping in to address
the gap created by a lack of bank branches at the regional level:
The commercial asset finance broker is a vital distribution
network that provides small and medium businesses located in regional Australia
an increased level of access to finance. Many regional towns or areas no longer
have a bank branch physically present or, if they are one of the lucky ones,
they might have one of the big branches represented. Outside of the big four,
there are many lenders who provide asset finance to small and medium
businesses—Capital Finance, the Bank of Queensland and Macquarie—but they do
not have an extensive branch network in regional Australia. This is where the
commercial asset finance broker provides access to finance for businesses
located outside of major cities.[13]
5.12
Representatives of CAFBA demonstrated that what is important to
successful regional lending is not an on-the-ground presence of the lender, but
of someone who understands the business that is seeking funds. CAFBA gave an
example of successfully assisting businesses to borrow funds from banks that
did not have a regional presence, and contrasted this to the inability of the
business to borrow from a local bank, because despite having local staff, 'they
just did not understand the goods.'[14]
5.13
The committee notes concerns that the loss of some funding sources,
following the GFC, may have disproportionately affected regional institutions.
The government is taking steps to address these concerns:
We have been particularly concerned with the demise of the
securitisation market, and that was a good funder of small business. The
regional lenders especially—lots of representations have been made to us by
institutions such as the Bank of Queensland and Suncorp and smaller lenders
which may be closer to the market—have been affected by the demise of the
securitisation market. That is why in the banking package we are pushing to try
to revive the securitisation market and to try to get a corporate bond market
going, because we think, again, that will provide funding.[15]
5.14
The committee also understands that the National Farmers Federation, in
conjunction with Canstar Cannex, is developing an 'NFF Agribusiness Monitor'.
In announcing the new service, Mr Jock Laurie of the National Farmers'
Federation argued that at present:
It is virtually impossible to know, with any certainty, how
your farm loan compared with others in the market, what the interest rate are
and how they compare across various loan products...This makes the decision
about changing your bank difficult and, ultimately, thwarts competition.[16]
5.15
The NFF Agribusiness Monitor is intended to 'shed new light on bank
rates and products',[17]
to assist agribusinesses to make an informed decision when selecting a finance
option.
5.16
Evidence indicates that the SME agribusiness shares the challenges of all
SMEs and others largely unique to the agribusiness sector. Treasury stated that
rural debt outstanding has increased in recent years and reported that '[c]ash
flows to rural sector businesses can often be volatile, particularly as a
result of extreme weather events, such as droughts and floods.'[18]
5.17
It appeared that there is a range of measures in place to assist SMEs
affected by extreme weather events. Treasury advised that the Australian
Government is providing the following assistance:
-
Farmers and agriculture-dependent small businesses experiencing
drought may be able to access interest rate subsidies of 50 per cent of the
interest on loans for the first year of an Exceptional Circumstances
declaration, and 80 per cent for second and subsequent years. These subsidies
provide recipients with up to $100,000 per year, and up to $500,000 over 5
years.
-
Affected farmers may also access professional advice and
financial planning assistance that helps them develop business plans and
identify ways to improve their farm management practices.
-
Employees, small businesses and farmers who have lost income as a
direct result of the extreme weather events since November 2010 may be able to
access the 'Disaster Income Recovery Subsidy' announced on 10 January 2011,
which provides a fortnightly payment of up to the maximum rate of existing
Newstart Allowance for 13 weeks.[19]
5.18
ADIs also indicated that there are measures in place to address cash
flow concerns resulting from recent natural disasters. ANZ and CBA have advised
that the ADIs are providing loan assistance to SMEs affected by the extreme
weather events in recent months.[20]
Abacus advised that its members are providing affected SMEs hardship relief,
which includes deferred loan repayments.[21]
ANZ also stated that cash flow concerns are factored into the bank's
agribusiness loans:
This segment...offers specific products for farming business,
such as revolving lines of credit which are specifically structured to account
for typical (i.e. infrequent) agribusiness cash flows as interest can be
charged in accordance with the customer’s income (i.e. monthly, quarterly, half
yearly or yearly).[22]
5.19
Overall, Treasury reported that the regional banks 'have done reasonably
well,'[23]
while the ABA considered that the 'outlook from the banking sector is very
positive for regional areas because of where commodity prices are.'[24]
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