Small business lending to improve: RBA

Small businesses can expect better lending conditions as the economy strengthens and competition in the banking sector increases, according to the Reserve Bank of Australia.

In a submission to a Senate inquiry into access to finance for SMEs, the RBA says competitive pressures are returning to the banking sector, although poor performing sectors including retail, property and agriculture will continue to struggle to secure finance.

Competition in the small business lending market eased following the onset of the global financial crisis, with reduced lending by smaller banks and non-financial institutions.

“This has resulted in a significant jump in (major bank’s) market share, accounting for about three quarters of lending to unincorporated businesses, and about 70% of total business credit,” the RBA said in its submission.

One concern among the small business sector is that interest rates on residentially-secured business loans are priced at a premium when compared to residentially-secured housing rates, with a difference of around 1.8% compared to 0.95% in early 2008.

In its submission, the RBA said it had taken the higher rates into account when setting the overnight cash rate, which is 4.75%.

“This pricing results from the higher expected losses on small business loans as well as the larger amount of capital that banks hold as a buffer against unexpected losses,” it said.

According to the RBA, small business borrowers are more than twice as likely to default as standard mortgage customers, resulting in a loss for banks.

But the RBA says competition for business lending is likely to increase as the economy recovers from the GFC.

“Foreign-owned banks are also likely to look to expand their presence in the market as global conditions continue to improve,” it said.

The news comes as National Australia Bank announces it will ramp up its campaign to undercut its larger rivals.

NAB chief executive Cameron Clyne says the bank’s strategy of abolishing fees and cutting prices is proving beneficial amidst Federal Government reforms to boost competition in the sector.

After consistently pricing its standard variable mortgage below the three other major banks since mid-2009, NAB is now growing its home loan portfolio at about twice the rate of rivals Commonwealth and Westpac.

NAB has also abolished fees on its basic transaction account, recording its strongest growth yet in transaction account numbers in December.

Meanwhile, Peter Strong, executive director of the Council of Small Business of Australia, has announced his support for consumer group Choice in its push for immediate access to a bank-switching scheme, based on a similar service used in Europe.

The Dutch switching system is a single-form, one-step process requiring banks to transfer direct debits automatically when a customer switches banks.

The Australian Government is in the process of examining how to make it easier for borrowers to switch lenders, including the introduction of portable bank account numbers, but no decisions have been made.

COSBOA and Choice have written to the banking industry, asking them to support portable bank account numbers.

According to Strong, small business owners are sick of being treated as “cash cows”, with many loathed to switch banks as it is too time consuming.

“A portable account number would cut the cost of changing banks and improve business owners’ ability to provide better services to customers,” Strong says.

Choice’s Richard Lloyd says the ability to switch banks is the key to driving competition in the banking sector.