New research from JPMorgan and Fujitsu reveals banks are more willing to finance SMEs, but the level of information SMEs need to address risk concerns is continually growing.
Martin North, executive director industry group, Fujitsu Australia & New Zealand, says higher lending requirements from banks leads SMEs to believe they have a harder time accessing finance, even though that finance is actually readily available.
But on the positive side, North that bank’s risk ratings on companies – that is, the extra they add on to a company’s lending rate to account for the riskiness of their business – are now “more realistic” than they were before the GFC, which indicates banks won’t increase interest rates at different levels for businesses than home owners.
“If you look at long-term rate increases, the issue has been risk. I think we’ll see movements in mortgages and SMEs move step-in-step now.”
“The biggest issue for banks is not whether rates will rise, but the uncertainty of their movements.”
North says banks are more willing to lend to SMEs, pointing to data suggesting about 80% of SME lending is profitable over the life of the loan – a significant improvement from 70% during the early years of this decade.
Additionally, the survey shows that while SME lending growth remained negative during the March quarter at -5.9%, the proportion of business lending attributable to SMEs has remained at a constant 20%.
NAB holds the largest proportion of SME lending at 26%, followed by WBC at 25% and then Commonwealth Bank at 24%. ANZ has the lowest share out of the big four with just a 15% share.
The biggest difference between pre-GFC condition and now, North says, is risk. Banks want more information about a business, more regularly, and won’t be as willing to lend if detailed documents regarding profitability and even cashflow aren’t available.
“There’s a fundamental shift going on since 2007 in terms of the dynamic of lending and financial services. Funding has significantly changed, and the moving of interest rates with SMEs is more to do with risk than anything else.”
“This isn’t a Machiavellian plot that some are saying it is. What we are seeing is that the risk of lending wasn’t adequately classified, and post GFC those criteria are now being assessed properly.”
But this has led to deeper dissatisfaction over the past few years, the research suggests. Nearly 60% of the report’s respondents were dissatisfied with their financial services providers during 2007-08. Additionally, the number of respondents saying they are “completely satisfied” or “very satisfied” has fallen.
This dissatisfaction has grown over the past year. In 2009, just under 14% of SMEs stated their greatest complaint was compliance with bank rules, but that has now grown to about 18%.
Complaints regarding misunderstandings, being pushed to online services and overall misunderstandings have dropped.
Additionally, just over 10% stated fees and interest rates were their biggest cause for dissatisfaction, but that figure is now at 16%, while dissatisfaction regarding the requirement for providing annual accounts has grown from just under 10% to about 14.5%.
However, North says this is the reality of doing business. “Businesses are going to need to produce greater levels of security if they want money.”
“They’re asking for management accountants, and whole amount of different information. The banks want more information and more frequently compared to two years ago.”
But despite SME banking becoming more profitable, North says demand for borrowed funds has dropped.
“The demand for credit amongst the small business sector is insipid. The theory goes that we’re over the GFC and everybody is trying to get more funding, but the small business sector is nowhere near as optimistic.”
“The demand is much lower, but there still is a strong willingness amongst the banks to lend to the small business sector if they can meet the risk criteria. I don’t believe there’s any rationing of lending.”
Confidence regarding the overall economy is essential before SMEs will start borrowing more, the survey reveals.
“In our view, confidence levels will need to be substantially stronger than we are seeing today for the change in the propensity to borrow to become materially positive,” it states.
“When assessing demand for credit, SME’s ultimately need certainty behind the cash flows being generated to service debt over a multi-year payback period before final commitment.”
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