But Emerson, speaking at a roundtable organised by CPA Australia and attended by Shadow small business spokesman Bruce Billson, ACCC chair Graeme Samuels and a host of small business and banking industry leaders, said finding solutions to squeeze on SME lending were difficult because the perception of the problem was worse than the reality in the market.
"If we are talking about perceptions of the situation, frankly I don't think we can ever fix it," Emerson told the spirited meeting.
"How come lending has returned to high levels if there is such a problem with access to finance? If we want to develop policy, let's develop policy for the reality and not for the perception."
The roundtable examined a number of possible solutions to the funding squeeze, including the establishment of a Government-backed bank to lend specifically to SMEs, as exists in Canada.
The Business Development Bank of Canada lends to 28,000 SMEs in that country and has a loan book worth $13 billion. Despite the impact of the GFC on North America, the bank's default rate is just 5%.
However, ACCC chair Graeme Samuel dismissed this idea, saying the experience of a similar Australian body, the Victorian Economic Development Corporation, highlighted why governments should not become bankers.
"It was shown to be economically totally irresponsible."
"With all respect to my friends in Canberra, I doubt that there are any bureaucrats that have got greater abilities than the banking sector to assess the credit worthiness of SMEs."
Another idea floated was the introduction of a specific government guarantee for small business loans, as strategy that has been common throughout the OECD during the past 18 months, with some governments guaranteeing up to 85% of SME loans.
However, Emerson said he was concerned about the "moral hazard" problems that could be created if the guarantee encouraged risky lending practices.
Emerson said the Government will continue to focus on encouraging new competition into the banking sector, either through attracting new foreign banks back to the market or helping to encourage capital to flow to Australia's smaller banks.
"I like to break down barriers to entry. I think we should do everything we possibly can to facilitate the entry of more lending institutions."
Emerson said the Fedearl Budget announcement that the Government would cut interest withholding tax, which is paid by financial institutions on the interest they earn from foreign borrowings, from 10% to 5% was one way the Government was trying to boost competition.
However, Opposition small business spokesperson Bruce Billson described the idea of a Government-backed SME bank as "attractive" and said the exploration of such ideas was why the Coalition had worked to set up a Senate inquiry into small business finance.
While there was general agreement about the need for more competition in the banking sector, there was also a clear message from the bankers in the room – don't expect things to change any time soon.
Australian Banker's Association chief executive Steven Munchenberg said the percentage of SMEs more than 90 days behind on their loans had "skyrocketed" from 0.65% to 4.5% since the start of the GFC, which gave banks little choice but to increase risk premiums on small business loans.
"The nature of lending... is not going to go back to what it was before."
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written by mikejohnson, May 22, 2010
The system that seems to work around the woirld is that the back's do the lending, and it's a recourse loan, so if you don't pay you get a bad credit record and lose assets (if you have any) but if there is a loss, the government pays for it.
The advantage to this method, if that the government can direct the funds where they are needed - i.e. stimulate lending to sme's (but not agricultral) in regional areas, or stimulate lending to low asset individuals in areas like Dandenong where there is high unemployment already.
There seems to be this misocnception that we lend people money - oh gosh, they are going to run riot. Hey - we have the same misconceptions about 18-22 year olds too.
Are they all party animals and drug takers????
written by cashstream, May 24, 2010
Competition can only happen as a result of the vacuums that exist within SME lending markets being filled .....being filled by lenders who can a) obtain wholesale funding b) get a return that is pragmatic.
Wholesale funding in the Aussie market is driven by one core banking group - the 4 pillars....
Having DIRECTLY explored the avenues for funding some niche lending vehicles, external banks and institutions will fund organisations but only those with track record and profitability (i.e. already trading) or with Private Equity funding an acquisition....into an existing loan book.
The issue is that the banks would be competing with themselves if they wholesale funded (or securitised loan books) ......and why would they do so if they are at the forefront of lending at the moment. It almost appears as if there a "tacit" agreement amongst the four pillars not to fund new start 2nd and 3rd tier lenders - which are clearly needed (just ask any SME which has recently applied for fixed asset finance for example - greater deposits are required as are better credits). Whilst the excuses of the GFC can be rather convenient to highlight why inter-bank/inter-financial institution lending might be lower, the combine harvesters are running overtime for the banks - and as long as the sun keeps shining for them their shareholders will see the hay they need.
This is also rather convenient when one considers the government support for the banks will expire in September, wherein the AAA rating of the Australian Government will no longer be available to support the banks .....the end result increased cost of funds to the banks - and guess what a more prudent allocation of cash to SME's and others - ie the potential for a second credit squeeze.
The four pillar system has one the one hand protected us from the worst of the GFC, but has the propensity to restrict credit as the economy moves forward.
The government backed loans has been very successful in Europe - especially in the UK, where the Small Firms Loan Guarantee scheme (now the enterprise loan scheme) was very successful (where the government stood as guarantor for loans (up to 85%) where the banks had insufficient security). This was geared specifically towards the SME sector.
This scheme would no doubt help the SME market phenomenally (for good proposals that lack security) but until the government gets organised SME's will still have to look deeper into the market for funding options - and frustration will be the operative word we will hear over and again. We dig very deep into the market on behalf of our clients and are equally frustrated and can see the gaps, which we want to fill.
There are good opportunities out in the market that are not being serviced effectively. Anyone got a spare $100m to help fund them ?
Good luck to all.
Tim Lea
www.cashstream.com.au
I would hate to see a government-backed small business bank - that is simply economic engineering at its worst. The Labour government has already demonstrated its lack of commercial understanding by saying a suitable rate of return for business would be the risk free rate of 6%!
What would work are government assistance programs to help small business address the system issues which make them a higher risk to existing lenders.