SMEs set for interest rate relief but big banks stop short of passing on full cut to business customers

Small businesses that have loans with Australia’s big banks will receive a small cut in their interest rates, following the Reserve Bank of Australia’s decision on Tuesday to cut the official cash rate to an historic low level of 1.5%.

While the country’s largest banks opted to pass on the full cut to business customers when the RBA last dropped the official cash rate in May, it is a different story this time around with the banks not passing on the full cut of 25 basis points.

Businesses with variable rate products with the Commonwealth Bank will receive a 0.13% reduction in their interest rates from August 19.

ANZ business customers will see interest rates on variable rate products drop by 0.10%, effective from August 12.

Westpac is also passing on some of the rate cut to its business customers, with rates for variable cash rate business loans decreasing by 0.10% from August 23.

National Australia Bank will also cut its standard variable business rate by 0.10%, which will come into effect from August 19.

Businesses with variable rate loans from the Bank of Melbourne, BankSA and St George Bank will also receive a 0.10% cut from August 23.

Neil Slonim, an independent banking advisor and founder of thebankdoctor.org, told SmartCompany this morning any reduction in borrowing costs for small and medium business is welcomed.

However, Slonim says given the historic low levels of base costs for business loans, the margins and fees applied to loans are increasingly becoming the biggest cost to business operators.

“While the base cost [of a loan] might reduce by 10 to 15 basis points, we’re really talking about historic low levels of base costs,” he says.

“In these circumstances, SMEs should be focused on the additional costs through margins and fees.”

Slonim says the large lenders are generally transparent when it comes to the fees that are applied to loan products, however “where possible, banks are looking to generate revenue by increasing margins”.

“If you’re business isn’t performing well or is in breach of its covenants, it’s more likely the banks will move more quickly to increase their margins than in the part,” he says.

“On the other hand, if you’re a good quality borrower and your bank tries to increase its margin and you think that is unreasonable, there’s a good change you’ll be able to get a better deal somewhere else.

“It’s all about knowing your bargaining strength.”

The big four banks also announced increases to term deposit rates, which Slonim says is a win for savers and those on fixed incomes.

“This is potentially a win-win for small businesses and borrowers, who will receive more on their term deposits and pay less on borrowings,” he says.

However, Slonim says while banks are likely attempting to “shore up their domestic deposit base” in a tight market, he says it’s unclear how long they will be willing to offer higher term deposit rates, as sooner or later they will seek to recoup the funds.

“Fees and margins, that’s where the recovery will come from,” he says.