Summary and Recommendations
Small business is a vital element of the Australian economy,
employing half the workforce. Lending to small business has slowed since the
global financial crisis, and interest margins have widened. The outstanding
value of smaller loans (under $500,000) has fallen in the agricultural,
manufacturing and financial sectors. Surveys of small businesses show that the
availability and cost of finance remains a major concern.
The slowdown in lending to small business appears to reflect a
combination of demand factors such as;
- less demand for finance by small business in the wake of the
global recession, as weaker sales mean that existing capacity is adequate and
there is not the need to borrow for investment;
- less demand for finance by small business as reduced confidence
leads to a more conservative attitude towards debt;
and supply factors such as;
- fewer small businesses being able to meet existing lending
standards in the wake of the global recession;
- some tightening of lending standards by financial intermediaries.
It is arguable that banks were tending towards recklessness in the preceding
boom, and that some tightening of credit standards represents a prudent return
to 'normal' practice, but there may also be cases where banks are
over-reacting; and
- non-bank lenders having fewer funds available as securitisation
and interbank lending markets dried up and/or interest rates in them became
prohibitive.
Witnesses were reluctant to apportion the roles played by
these various factors.
Most small businesses borrow at variable interest rates. Banks
did not fully pass on the reductions in the Reserve Bank's policy rate between
August 2008 and September 2009 to small business borrowers but fully passed on
the subsequent increases. Over this period, banks have widened the margin
between the cost of their funds and the rate they charge small businesses on
loans. Some view the near-simultaneous increases in interest rates as a form of
price leadership. Banks have also increased the fees they charge small business
and required greater security for their loans.
These developments 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.
The Committee is concerned that bank exit fees on variable-rate
loans are an impediment to competition in that market.
Recommendation 1
5.29 The Committee recommends 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 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.
Recommendation 2
6.28 The Committee reiterates its recommendation that the
Government retain the 'four pillars' policy of not allowing a merger between
any of the four major banks.
Recommendation 3
6.29 The Committee recommends 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.
Recommendation 4
6.30 The Committee reiterates its recommendation 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 and does not require a firm to have
unfettered power to set prices. A specific market share, such as, for example,
one third (set based on international practice), could be presumed to confer
market power unless there is strong evidence to the contrary.
Recommendation 5
6.31 The Committee recommends that the Government request 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.
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). The Committee prefers to increase competition within the existing
commercial banks.
The Committee believes that small business will be better
placed to benefit from a competitive market, and place pressure on banks to
make the market more competitive, if they have a stronger understanding of
financial markets. It commends the Australian Securities and Investments
Commission for developing a small business portal to explain concepts relating
to small business credit and those banks which have also developed online tools
for small businesses.
The Committee notes that some other countries have a specific
code of conduct governing banks' lending to small business.
Recommendation 6
7.14 The Committee recommends that the Australian Bankers'
Association meet with small business representatives to develop a code of
practice for lending to small business.
The Committee notes that farmers comprise an important class of
small business and have had difficulty attracting credit to tide themselves
through droughts or periods of low prices.
As there is inherently more risk in subscribing venture capital
than in making a secured loan, the increase in risk and risk aversion that
occurs in recessions tends to lead to larger reductions in the provision of
capital than in loans. The Committee, however, received far more submissions
about lending to small business than about the provision of venture capital, so
while it offers some comments in this area is not in a position to make
recommendations.
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