One week ago, small businesses were expecting lower lending rates, courtesy of another Reserve Bank rate cut. Now, they’re being slapped with interest rate rises – on top of SME rates that were already well above those charged for mortgage holders or big business.
There are expectations that Commonwealth Bank and National Australia Bank will raise small business and mortgage rates this week, citing higher costs of funding and sluggish domestic demand.
This follows decisions by ANZ and Westpac on Friday to lift their small business loans and variable home loans by 0.06 and 0.1 percentage points respectively.
The rate rises prompted Assistant Treasurer Mark Arbib to note that banks’ net interest margins have returned to pre-global financial crisis levels and Treasurer Wayne Swan to call on borrowers to look at alternative lenders.
But small business faces a double whammy: not only is it more cumbersome for it to switch lenders, but its rates are much higher than loans for mortgages and big business.
Recently released Reserve Bank figures show that the big banks’ average rates were 8.25% on small business, compared with 6.59% on mortgages and 6.7% for big business. Similarly, margins charged to small business above the cash rate have soared to 6% from 3.45% before the global financial crisis.
Peter Strong, executive director of the Council of Small Business of Australia, says the rate rises from ANZ and Westpac will dint confidence among small business, because they will feel they can’t predict the direction of rates.
“They’ll wonder if it is worth getting a loan, because you’re not sure what it’s going to be anymore,” Strong says.
This uncertainty is compounded by the widening gap between mortgage lending and small business lending.
Strong says about five years ago the difference was as low as 50 basis points, but it has since soared to 150 basis points or more.
“The banks say it’s about the rules on holding more money on reserve for small business loans. APRA and the RBA need to look at that,” he says.
Strong says COSBOA is planning to hold a round-table to discuss finance to small business. The forum is expected to be held over the next month or so, with guests including the banks, the Australian Bankers Association, the prudential regulator, the Australian Securities and Investments Commission, the Reserve Bank and finance experts.
He says the forum is designed to discuss how small business finance is working now, and what can be improved.
“We’ve asked for better information, because we’re all in a vacuum when it comes to how many loans have been applied for, how many have been rejected and why,” Strong says.
“We find that people aren’t applying because they don’t think they’re going to get a loan, and maybe we can develop a plan to encourage people to apply or apply better.”