Lending reforms will clarify small business “grey area” in move to increase SME credit flow

Treasurer Josh Frydenberg says it will be easier for small businesses to get bigger loans from banks under changes to responsible lending rules designed to bolster access to finance amid the COVID-19 pandemic.

The reforms, which will wind back lending protections legislated in the wake of the global financial crisis in 2009, are set to make it easier for banks to take on riskier loans, with fewer hoops for borrowers to jump through.

Under the changes, borrowers will bear greater responsibility for loans, empowering banks with less strict frameworks to let credit flow under regulations overseen by the Australian Prudential Regulation Authority (APRA) and corporate regulator the Australian Securities and Investments Commission.

This will be done by removing responsible lending obligations for all lenders, except for those using small account credit contracts or consumer leases, although lenders will be regulated by other APRA lending standards.

While small businesses aren’t subject to responsible lending laws like consumers are, the government will move to clarify what Frydenberg said is a “grey area” in the test of responsible lending to business customers that’s led some banks to be excessively cautious.

Basically, some banks had been concerned that small businesses do fall under aspects of the responsible lending framework, and the government argues this has been holding up credit flow to SMEs.

In practice, Frydenberg said it will now be easier to apply for a business loan, with an expectation that banks will now take on riskier debt profiles in small business markets.

“The test for responsible lending, as it applies to small business, has been what is the predominant purpose of the loan. And this has led to a grey area and some confusion,” Frydenberg said.

“So our changes will make it very clear that the prudential framework that’s in place is not to apply to small business lending.

“We want small business to access lending.”

Small business owners have complained throughout the pandemic about difficulties securing finance, with survey panels indicating up to a quarter of applicants are being rejected.

Reserve Bank of Australia governor Phillip Lowe told a parliamentary committee last month that the regulatory “pendulum” had probably swung too far in the direction of blaming banks for bad loans.

“We can’t have a world in which, if a borrower can’t repay the loan, it’s always the bank’s fault,” he said.

“On a portfolio basis, we want banks to make some loans that actually go bad, because if a bank never makes a loan that goes bad, it means it’s not extending enough credit.”

The Reserve Bank has observed no increase in lending volumes to SMEs during the COVID-19 pandemic, meaning that despite existing government lending incentives and a recession, access to finance has not increased for small businesses.

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