Interest rates on SME loans will rise as credit crunch drags on

St George Bank’s decision to increase its standard variable mortgage rate by 0.2% could be just the start of another round of increases on home loans and SME business loans, a financial services expert has warned.

St George Bank’s decision to increase its standard variable mortgage rate by 0.2% could be just the start of another round of increases on home loans and SME business loans, a financial services expert has warned.

Martin North, financial services consulting director and general manager at Fujitsu Consulting, predicts a period of turmoil for banks in the next 12 to 18 months as the impacts of the credit crunch wash through the wider economy, and he says SMEs will not escape.

“I think SMEs should definitely be prepared for additional uplifts because of the credit crunch,” he says. “Our expectation is that SME owners should be planning to pay an additional 0.2% to 0.35% (on top of the RBA’s cash rate) for some time.”

North says there are two main reasons rates will continue to climb. First, the credit squeeze is continuing to push up the cost of funding for banks, and particularly small banks like St George which do not have a big deposit base. (Indeed, he believes that even after raising its mortgage rate, St George still would not have recovered the cost of funds.)

Second, the credit squeeze has forced many smaller lenders out of the SME market, leaving the big four banks controlling around 63% of the business lending market. Without competitive tension in the SME loan market, loan pricing is unlikely to fall. “I can’t see anything that is going to turn that lack of competitive tension around,” North says.

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