Small business minister Craig Emerson says competition will improve SME access to finance

Federal Small Business Minister Craig Emerson says the Government will focus on encouraging competition in the banking sector to improve access to small business finance, but has ruled out introducing a specific Government guarantee for SME loans over fears of “moral hazard”.

But Emerson, speaking at a roundtable organised by CPA Australia and attended by Shadow small business spokesman Bruce Billson, ACCC chair Graeme Samuels and a host of small business and banking industry leaders, said finding solutions to squeeze on SME lending were difficult because the perception of the problem was worse than the reality in the market.

“If we are talking about perceptions of the situation, frankly I don’t think we can ever fix it,” Emerson told the spirited meeting.

“How come lending has returned to high levels if there is such a problem with access to finance? If we want to develop policy, let’s develop policy for the reality and not for the perception.”

The roundtable examined a number of possible solutions to the funding squeeze, including the establishment of a Government-backed bank to lend specifically to SMEs, as exists in Canada.

The Business Development Bank of Canada lends to 28,000 SMEs in that country and has a loan book worth $13 billion. Despite the impact of the GFC on North America, the bank’s default rate is just 5%.

However, ACCC chair Graeme Samuel dismissed this idea, saying the experience of a similar Australian body, the Victorian Economic Development Corporation, highlighted why governments should not become bankers.

“It was shown to be economically totally irresponsible.”

“With all respect to my friends in Canberra, I doubt that there are any bureaucrats that have got greater abilities than the banking sector to assess the credit worthiness of SMEs.”

Another idea floated was the introduction of a specific government guarantee for small business loans, as strategy that has been common throughout the OECD during the past 18 months, with some governments guaranteeing up to 85% of SME loans.

However, Emerson said he was concerned about the “moral hazard” problems that could be created if the guarantee encouraged risky lending practices.

Emerson said the Government will continue to focus on encouraging new competition into the banking sector, either through attracting new foreign banks back to the market or helping to encourage capital to flow to Australia’s smaller banks.

“I like to break down barriers to entry. I think we should do everything we possibly can to facilitate the entry of more lending institutions.”

Emerson said the Fedearl Budget announcement that the Government would cut interest withholding tax, which is paid by financial institutions on the interest they earn from foreign borrowings, from 10% to 5% was one way the Government was trying to boost competition.

However, Opposition small business spokesperson Bruce Billson described the idea of a Government-backed SME bank as “attractive” and said the exploration of such ideas was why the Coalition had worked to set up a Senate inquiry into small business finance.

While there was general agreement about the need for more competition in the banking sector, there was also a clear message from the bankers in the room – don’t expect things to change any time soon.

Australian Banker’s Association chief executive Steven Munchenberg said the percentage of SMEs more than 90 days behind on their loans had “skyrocketed” from 0.65% to 4.5% since the start of the GFC, which gave banks little choice but to increase risk premiums on small business loans.

“The nature of lending… is not going to go back to what it was before.”