Big banks are neglecting $120 billion need for SME lending, Judo Bank warns

Banks are neglecting the lending needs of small businesses and startups, with an estimated $120 billion in unmet need outstanding, according to Judo Bank chief executive Joseph Healy.

A submission from Healy, on behalf of the SME-focused neobank, to the Senate Committee on Australia as a Technology and Financial Centre, suggested a failure of the big banks to meet the requirements of the small business community.

It called out a “significant and unhealthy bias” towards mortgage lending, while SMEs and startups struggle to secure loan funding.

“The genesis of Judo was a belief that there was a market failure in the provision of credit to the SME economy by the banking system,” Healy said in the submission.

SME lending in Australia has “progressively been shrinking”, while bank lending for mortgages is only going up, sitting at about $1.8 trillion.

SME lending, by comparison, sits at around $400 million, the submission says. And there’s some $120 billion in additional unmet need.

“Even if 50% of the unmet demand is un-bankable, it would still leave roughly $60 billion in a market that is roughly $400 billion in size,” it went on.

“The bias to housing in how banks allocate capital carries a material opportunity cost in an economic sense.”

Healy outlined the four ‘Cs’ of credit risk management: character, capacity, capital and collateral.

It suggested the incumbent banks tend to default to the latter only, with the majority of lending decisions “predicated on the availability of property as security”.

Judo offers loans of up to $20 million to SMEs, with an average loan size of $2.5 million.

Since launching its lending operations in April 2018, it has lent about $3.5 million to Aussie businesses.

That includes $2 billion lent out since the beginning of the COVID-19 crisis in Australia, in March 2020. In the same time frame, Healy said bank lending to SMEs has fallen by 2%.

Ombudsman calls for transparency

Healy’s comments touch on something of a contentious topic in the small business community. The COVID-19 pandemic has highlighted the challenge in accessing loan funding from traditional sources.

The federal government’s $40 billion unsecured loan program saw lacklustre takeup, with small business owners facing reluctance from the banks, high interest rates, confusing marketing and onerous application processes for relatively small chunks of cash.

Brokers have also suggested the program simply didn’t fit the market particularly well.

At the same time, we’ve seen an influx of non-bank lenders swooping to fill the void. Buy-now, pay-later provider Zip has launched a product offering up to $150,000 credit for SMEs, while Afterpay has also hinted at an expansion into SME lending. And, earlier this month, invoice financing fintech Butn listed on the ASX with a valuation of $80 million on debut.

In his own submission to the committee, Australian Small Business and Family Enterprise Ombudsman Bruce Billson highlighted the challenges SMEs and, in particular tech businesses and startups, face in accessing capital.

He called for more accountability and transparency from banks when loans are denied.

‘De-banked’ businesses are rarely given any official reason as to why their applications are denied, Billson wrote. That could have broader economic implications.

“The persistent inability of startups, many of which are small businesses, to access basic banking services, risks stunting Australia’s technology and financial industries through unintentionally limiting competition before their true potential can be realised.”

Billson recommended the appointment of an ‘appropriate entity’ that would require financial institutions to “provide clarity around the robustness of decision-making” when it comes to denying services to businesses.

Consideration should also be given to publishing this information, and to review processes undertaken by the Australian Financial Complaints Authority.

“Government should be proactive in building its understanding of why financial institutions make decisions to de-bank business,” he wrote.