The head of business banking at NAB says small businesses have been left behind by the banking system, admitting that banks focus on larger companies.
Speaking at the Australian Securities and Investments Commission annual summer school NAB’s Joseph Healy said the regulatory framework makes it tougher to lend to the small business sector, which he described as the “engine room” of the economy.
Prudential rules require Australian banks to hold up to four times as much capital against small business loans compared to a mortgage.
Healy said it is more profitable and less capital intensive for banks to focus on residential and blue chip corporate lending.
According to Healy the banks simply defend criticism they that they don’t lend to SMEs rather than addressing the issue.
“The banks tend to be more defensive and argue that ‘we are lending money, what is your problem?’ and produce a whole bunch of statistics,” Healy said.
Healy said the problem lies with the system, describing it as a “one size fits all” approach.
“The special needs of small to medium enterprises have been left behind … I think we need to recognize the need to address the specific needs of small businesses,” he said.
According to Healy small business borrowing has fallen over the past decade after being on par with the household sector. For every $1000 loaned to households in 2010 only $600 was loaned to small businesses.
Healy attributes that partially to the introduction of Basel II, a set of capital rules that makes it more profitable to put the marginal dollar into a household loan rather than a business loan.
In addition to tougher capital rules new consumer credit laws came into effect at the start of this year that require greater scrutiny of all mortgage, credit card and personal loan borrowers.
The National Consumer Credit Protection Package dictates that lenders must not provide or arrange credit that is unsuitable for a borrower and must meet new, more thorough disclosure requirements.
Ross McEwan, head of retail lending at the Commonwealth Bank, says the new code is designed to give consumers more protection but might limit credit access for some borrowers.
According to McEwan the new legislation requires far more detail to validate a borrower’s income, which requires extra time and will therefore lower the lender’s return.
Low documentation credit is expected to be severely affected because it is typically more difficult for lenders to assess the financial position of self-employed borrowers.
NAB head of retail banking Lisa Gray says: “We may see less brokers vying for banking business as some decide the additional costs of compliance are too much.”
The comments come on the back of an aggressive marketing campaign by NAB called “Break up with your bank” that offered financial incentives for CBA and Westpac home loan customers to switch to NAB.
CBA and Westpac hit back with their own campaigns, honing in on NAB’s business customers with the promise of waived establishment fees and no liquidity margins.
Peter Strong, executive director of the Council of Small Business of Australia, said the campaigns fail to make lending any easier or cheaper for small business, describing them as a “mere distraction”.