Should small business loans be capped at $1 million? Banks questioned over lending practices

This week’s inquiry into small business loan practices saw the big four banks in the spotlight yet again this year, and the focus was on loan limits, communication and fairness.

Small Business and Family Enterprise Ombudsman Kate Carnell grilled senior management from the Commonwealth Bank, ANZ, NAB and Westpac on Tuesday and Wednesday, asking for specific explanations on how the banks explained complicated loan contracts and requirements to small businesses. Carnell drove home repeatedly how “naïve” she had been when previously taking out a small business loan for her own business, at the time unaware of the number of factors that could have affected her loan conditions in the long term.

Read more: Small business ombudsman’s hearings will help redress power imbalance between SMEs and banks

The $1 million limit

Proceedings kicked off on Tuesday with the team from ANZ, where deputy chief executive Graham Hodges the first to face questions about what the banks should consider the upper loan limit for a small business contract. ANZ sets this limit at $1 million, with larger loan contracts rolling into a “wholesale credit” environment, in which required reviews and non-monetary covenants on the loan are set at different levels.

Carnell pointed out to Hodges that the $1 million limit was not in line with what many individuals needed to borrow to buy a business as a going concern, like a farm or pharmacy.

“Buying a going concern, let’s say, a decent restaurant – I’m just looking at standard small businesses, you know, you would be pushing your luck to buy a decent one underneath that sort of – that sort of limit,” Carnell said.

“I agree that there are many businesses who would be borrowing more than $1 million from us who would absolutely consider themselves small businesses,” Hodges agreed.

Meanwhile, NAB, Westpac and the Commonwealth Bank all spoke to how the new unfair contracts protections that came into effect in November are now affecting the way they draw up standard form contracts for small business loans for $1 million and under.

Westpac and the Commonwealth Bank spoke to the possibility of removing non-monetary covenants on loans of less than $1 million, which would mean conditions on the loan other than regular repayments of the balance could not lead to clients potentially defaulting.

“$1 million is just too low,” Carnell said on the prospect of ‘simplifying’ loan terms at this limit.

“You can’t buy a pharmacy for less than a million, so my example, which is just a straight small business example, surely there are scenarios where you say, “Well, if your LVR [loan to valuation ratio] is below such and such, we’re happy with the business case because we wouldn’t have given you the loan if we weren’t.”

Explaining complex documents

Along with discussions on loan limits, Carnell and inquiry leader Anne Scott asked each bank to outline what they were doing to ensure small business owners, including those who do not have English as a first language, properly understand all the factors that could affect the terms of their loan over time.

One lender got out on the front foot on issues of clarity, with Westpac’s chief of business banking David Lindberg putting forward five suggestions to improve the landscape off the back of the inquiry’s terms of reference, including having standardised default and enforcement notices and timeframes for each bank that deals with small business loan customers, and having a requirement for the banks to report enforcement action taken on loans to the ombudsman on a regular basis.

Carnell welcomed these recommendations, but then drew the bank’s attention back to the communication between the bank and a loan customer. Throughout the inquiry hearings, it was repeatedly raised that while the big banks operate as a range of separate teams and entities, business owners see banks as a cohesive whole and expect consistent messages to flow through to them.

The ombudsman drew attention to instances where businesses have received “different messages from relationship managers who are really positive and [told], ‘Everything is going to be fine’, and then a very different view from, say, another part of the bank if things aren’t going that well.”

This is particularly stressful for business owners when one part of the bank assures them that their position is strong, then another part of it swoops in with news that the institution will have to do something like reduce its exposure to the borrower.

Carnell argued that the terms and conditions attached to many loans are legally complex and make it difficult for an individual to understand potential problems down the line.

On the issue of communication, Westpac’s Lindberg said the current Banking Code of Practice was not “clear enough” for customers.

“We’ve asked for the code to be rewritten independently,” he said.

The fragmented nature of the small business space within the big banks, and the impact this has on a customer getting multiple sources of feedback, is something that’s only recently been reviewed, said some executives.

Leigh O’Neill, executive general manager of micro and small business at NAB, told the inquiry the bank had only just brought different parts of its small business banking together.

“We’ve recently organised our structure around small business, so we have invested resources and time in bringing together all parts of the bank that look after small business,” she said.

While acknowledging this was an “obvious” change, O’Neill said it was a recent attempt to reduce the number of points of feedback a customer had with the bank about a loan.

The ombudsman will now review the findings of the inquiry before making recommendations to the federal government about how to simplify the small business lending space.