Cold comfort for the small guys

Glenda Korporaal
JULY 16, 2014
THE AUSTRALIAN
SMALL business in Australia can take little comfort from the words of the Murray inquiry into the ­financial system — or at least its progress as outlined by yesterday’s interim report.
While the interim report discusses the challenges facing small business raising funding in the years post the global financial crisis, its basic tenet is that small business will pretty much always face fundraising challenges as it is riskier by nature.
And it outright rejects the argument that tighter capital adequacy requirements on banks, which are being implemented globally in the wake of the crisis, have affected the supply of lending to small and medium sized companies. “The inquiry has received little evidence that capital requirements have affected either the supply of lending to SMEs or the relative pricing of secured and unsecured loans beyond what reflects the relative riskiness of the loans,” it declares.
This will surprise many who see the new Basel risk-weighting requirements on the banks as pushing bankers even further towards the safer haven of mortgages and away from inevitably riskier small business lending.
The report points out that one of the shifts in the Australian fin­ancial system since the crisis has been the increasing exposure of banks to residential mortgages.
The report acknowledges that the credit spreads on both small business lending and personal loans and the Reserve Bank cash ratio have blown out considerably since the crisis. But — in words which will surprise many in small business — it argues that “access to external debt funding is not a major issue for most SMEs”.
“In general, the majority are successful in getting a loan application approved. Since 2006-07 approval rates have been well above 80 per cent.”
There are some problems with this argument as it does not take into account borrowers who may be discouraged from applying in the first place. The fact the cost of borrowing has blown out will deter many borrowers from even applying as it makes their proposed investment uneconomic.
And the statistics do not spell out how many potential small business borrowers may also be deterred by banks requiring more collateral for loans post crisis, such as mortgages over the owners’ homes, or outright discouraged from applying in the first place by their bankers.
To its credit, the report does acknowledge the fact that “many lenders (to SMEs) are requiring more security, usually residential property, against business loans” and raises “concerns” about the fairness of some non-monetary covenants in SME loan contracts.
Getting funding for small business right in Australia is critical. It sounds trite, but a healthy small business sector is the lifeblood of a thriving economy, particularly in Australia. And with the big cutbacks in jobs by the big employers in wake of the GFC, and more recently from those in the mining sector, they are one of the few areas of new employment.
It notes that Australia’s two million SMEs employ almost 70 per cent of the workforce, which is large by international standards. “SMEs account for over half of the output of the private sector and tend to be a major source of innovation in the economy.”
For all its 460 pages, one gets the feeling that there may be less to this Financial System Inquiry than meets the eye, particularly when it comes to the banking side of things. When it comes to proposed action or potential action, the bulk of the suggestions are directed at the superannuation sector. Maybe not too surprising from an inquiry headed by someone who spent most of his career at the country’s largest bank.
Yes, there is a lot more concentration in the Australian banking system than there was before the GFC, it agrees, but argues that system is still highly competitive.
But the good news is that those in small business in Australia who are having trouble raising funding have been thrown a bone.
The problem is not that the banking sector has become highly concentrated and the big banks are opting to focus their lending on mortgages. No, no. It’s all about “information asymmetries” that are “the most significant structural factor contributing to the higher cost and lower availability of credit for SMEs”.
This happens because lenders are short on data about the financial history of the prospective borrowers. Cut down on “information asymmetries” and life will be a lot smoother for prospective small business borrowers.
The solution? “Facilitate development of a small and medium-sized finance data base to remove information asymmetries between lenders and borrowers.”
A sort of government boosted Dun and Bradstreet maybe?
If the SME sector in Australia is worried about access to finance, it needs to raise its voice even louder, make new submissions to the inquiry before the August deadline and “make some noise”, as they say in sporting venues, before the various public hearings which will be scheduled.
Meanwhile the message to those in small business land is clear — work on those information asymmetries, will you.