It’s not just households saving, report shows SMEs are too

Small business is matching fragile consumer sentiment by hoarding cash and hesitating to borrow, with new figures showing SMEs are net depositors – and the deposit to lending ratio is climbing.

According to an East & Partners study of Australian Prudential Regulatory Authority figures, for every dollar borrowed by small- and medium-sized businesses, $1.27 is in deposits. For businesses with revenue less than $5 million, that ratio is even higher at 2.17, the Deposit Funding and Debt Funding index finds.

East & Partners principal analyst Paul Dowling says the deposit to lending disparity has been going on for about 12 months, and the pace is accelerating.

“It’s what people do in times of uncertainty: hoard cash, spend carefully, don’t increase borrowing,” Dowling says.

“We’re seeing exactly the same behaviour in consumer and business markets at the moment.”

Dowling says the disparity has accelerated over the past three or four months – in line with downbeat data – and is likely to stay that way until there’s a significant change in business sentiment.

“It’s largely conditioned by consumer sentiment. Consumers are saving and paying down their debt, and the retail mortgage market is flat. Until that changes, I don’t see any likelihood of these dynamics changing.”

Dowling says the lower borrowing rates versus deposits are being underpinned by several things.

First, banks have made deposit rates attractive at between 5-6.3%, and are increasingly demanding customers deposit money in return for lending services, as part of a “whole of wallet” push.

Further, credit access has been tightened by stricter borrowing standards.

“For all their rhetoric, banks are still making high barriers,” Dowling says.

“The small business experience remains that nonetheless it’s very difficult to borrow.”

Dowling says the figures show that not only is there a two-speed economy in terms of the resources sector and everyone else, but there are large disparities between big and small companies.

“Sentiment is depressed and there’s a lot of fragility, so businesses are finding it hard to pick a path through this uncertainty and therefore are not hiring, investing or borrowing,” Dowling says.

Dowling says while the caution is understandable, if small business continues to play cautious on lending, there will be “major consequences for the economy as a whole.”

“If the sector is not investing, looking to grow, then economy will be damaged,” he says.

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