Wake up, Wayne

Wayne Swan needs to start seriously looking at the issue of bank lending to SMEs. The Opposition’s idea of a Parliamentary inquiry has merit.

If you want evidence that the Federal Government must do more to encourage competition in the business lending sector, just ask Flight Centre boss Graham Turner.

After unveiling an impressive profit upgrade last week, Turner said the company was likely to be more conservative about its dividend payout ratio, to ensure it retained enough cash keep its borrowings to a minimum.

It was a lesson hard learned during the GFC.

“We only have small borrowings but the banks still made life hard. It was on their terms if you needed to do any borrowing in the past year, and that was for everyone, every business with borrowings,” Turner told The Australian.

“There’s only four banks in Australia, and no one else existed there for a while, but they laid down the rules and chose their own margins and those margins quadrupled almost overnight.”

“Most businesses will have long memories as to who they will deal with again.”

If a company with the size, global brand, track record and management team of Flight Centre has been affected by the banks’ stance on business lending, you can only imagine how hard small- and medium-sized companies have been hit.

It started with the banks’ decision not to pass on the RBA’s full official interest rate cuts – mortgage rates fell quickly thanks to political pressure, but business loans were another matter.

Then came the rationalisation of the banks’ loan books – risk premiums were increased almost across the board, loan covenants were changed without notice and companies in certain sectors (such as property and retail) were invited to look elsewhere for credit.

Even now, with the recovery underway and companies in expansion mode, stories of trouble getting bank finance abound.

One restructuring consultant said last week he was working with a client who was asked to pay a big, one-off fee if he wanted his loan facility rolled over. Another client, in the struggling property development sector, was told that the finance facility on his 90%-completed development would not be rolled over – without more equity, the bank would step in, take control of the project and appoint receivers.

It would be nice to think, as Turner suggests, that entrepreneurs and business owners will one day get the chance for a bit of revenge and use their “long memories” to play hard-to-get with the banks.

But at the moment that looks like a forlorn hope – the market is simply not competitive enough. The takeovers of BankWest and St George by Commonwealth Bank of Australia and Westpac Banking Corporation respectively have taken two solid competitors out of the market and there are no new players emerging.

The Government must do more to help encourage competition.

While it appears the big banks no longer need the Government’s lending guarantee, keeping it to allow regional banks to get back on their feet and chip away at the big four would be a good idea.

Encouraging recovering foreign banks into the profitable Australian market might be a good idea, too.

But most of all, Wayne Swan and Kevin Rudd need to be seen to taking a stand on this issue. While plenty of political pressure is applied to the banks on the issue of mortgage rates, SME lending rarely seems to get a mention.

In contrast, the opposition will try to get a Senate inquiry early in the new parliamentary year. It’s highly unlikely, but bipartisan support for such an inquiry could be the best way of putting some pressure on the big four.

This piece was originally written for Business Spectator’s Wake Up Australia’s campaign.