This matter is too serious for bank bashing. The Australian banking industry, as it is presently structured, is unable to fund the needs of small and medium-sized businesses. Until now, it has not mattered too much because most enterprises were reluctant to invest. But now they need to invest merely to keep their businesses alive, let alone to expand.
Large companies can raise equity, but small enterprises need bankers. However, at the moment, for many good businesses, the money is simply not there. This week’s KGB Interrogation is with three experienced business loan brokers. They can tell a good business from a bad one and they are finding it extremely difficult to get finance for good borrowers. I am getting the same message around Australia. Matthew Quinn at Stockland has been forced to be banker to his small shopping centre tenants so they can keep their shop fittings up to date.
Westfield is doing the same thing. But small shop keepers who are not in big shopping centres are finding it hard to update their shops, even if they are earning good profits. The same applies to equipment for a variety of good businesses. The KGB Interrogation sets out the problem very clearly – the banks are only happy to provide finance if there is an after-market for the equipment – a car is a good example. But if there is no after-market, the going is tough even for those enterprises with good records. In most cases, the small entrepreneurs have put their houses on the line. Although, in many of the loan calculations the business is given little or no value and the bank discussions are all about what happens if the business fails. The brokers say that interest rates are not a problem. Banks have put them up but the brokers say their good clients will pay another two per cent, provided they can get the money.
What has caused the problem and what do we need to do about it?
As the brokers explain, the most obvious cause is that there has been a dramatic decline in the number of suppliers of loans to small and medium business. Not only has there been big bank takeovers of smaller banks but many overseas groups have left the business equipment market. Banks themselves no longer have enough expertise to assess the value of a vast number of enterprises.
The banks are nervous that there will be a downturn and they will be left with useless businesses where employees take all the money via ‘entitlements’ such as holidays, long service leave, etc.
But it goes further. As UBS research shows, Australian growth in loans to both the housing and business market have been funded by overseas lenders. According to UBS, Australian banks are getting close to the upper limit of loans that overseas institutions are likely to provide to Australia. And worse still – as ANZ points out – the European crisis could contract the amount of loan money available to Australia and lift its cost. In order to achieve growth, the banks need to expand their local deposit base and/or issue bonds.
That will require enticing superannuation funds away from equity.
Tony Abbott has virtually declared that the ALP is the party for big business and big unions. He is going to represent smaller businesses and the people who work for them. If he understands that big banks are starving small enterprises of capital then he is likely to play hard-ball with the banks.
That might be counterproductive. Banks have to entice the superannuation money with better deposit rates and lend it to the better small and medium-sized enterprises who can afford to pay the higher rates. That’s the base for a solution.
Back in 1990 when ANZ and Westpac were on their knees and the Commonwealth was very conservative, National Australia Bank took the opportunity to dramatically lift its business market share. Westpac and CBA have a big housing book and the ANZ is looking at Asia. If NAB can’t acquire AMP, maybe the opportunity is there again. If banks are not motivated to finance good smaller enterprises then we will see some nasty bank bashing given the higher levels of profit which are being produced by all banks including ANZ, as demonstrated in its financial results yesterday.
This article first appeared on Business Spectator.
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