The Reserve Bank of Australia is urging the Financial System Inquiry to scrutinise barriers to small business loans, as it also pushes for action to increase supporting infrastructure for capital market funding.
In its submission to the Murray inquiry yesterday, the RBA says the focus should be on small business loans, rather than competition in the home mortgage market.
“The market for small business loans has more structural impediments to competition than most other lending markets, because information asymmetries tend to be more significant,” the RBA’s submission says.
“The Bank considers that this market should be the focus of inquiries regarding competition in lending, rather than the mortgage market.”
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The Reserve Bank says despite the recent trend toward market-based funding, some banks still play “an integral role” in helping bring firms to capital markets.
According to research from CPA Australia in 2012, the two largest sources of finance for small businesses are credit cards and secured bank loans.
The RBA says most small businesses continue to use loans from financial institutions for their debt funding because it can be too difficult and costly to raise funds directly from capital markets.
In the decade preceding the financial crisis, access to finance for small businesses increased, however since the global financial crisis lending conditions have tightened.
“Smaller businesses are typically viewed as having more volatile revenue streams, and there are often greater information asymmetries, compared with large businesses,” the RBA’s submission says.
But while access to finance may be difficult for some small businesses, the 90% which are able to secure a loan have better conditions with the current historically low official cash rate.
New research published this week by finance site Mozo found banks have passed on more of the RBA rate cuts to small businesses than they have to consumers for credit cards, personal loans and home loans.
Since January 2012, 94% of the RBA’s rate cuts have been passed onto businesses, while only 50% have been passed on for personal loans, according to Mozo.
The research shows business credit cards have also seen twice the fall in rates as personal credit cards, dropping 25% and 11% respectively.
Mozo founder Rohan Gamble said in a statement the average business loan rate is now 6.93%.
“The signs are positive that the banks are now valuing, and investing in, their business customers and that Australia’s SMEs will be able to get access to competitive business funding and banking services to support their growth,” he says.