Having to jump through hoops to get a bank loan to support the growth of your business can slow things down, especially given banks can be very conservative when it comes to lending to small businesses. They tend to require up to four times more security for a small business loan than a mortgage, for example. Now a senior figure within the Australian banking industry has highlighted the problem – and suggested cause.
Speaking at the Australian Securities & Investments Commission (ASIC) Summer School, NAB Group Executive for Business Banking, Mr Joseph Healy said, “The special needs of small to medium enterprises have been left behind as the banks and the financial system have focused on areas that arguably present a higher profitability.”
“I’m going to be somewhat provocative and say that I don’t believe the banking system here has best served the interest of small business.”
Mr Healy is responsible for the bank’s relationships with small to medium enterprises (SMEs), corporate and institutional clients in Australia, as well as leveraged and acquisition finance, integrated capital solutions, financing products and working capital services. It is his view that the way the financial system is regulated, legal constraints, and the profit motive cause a skew in lending away from small business. In a country such as Australia, where 96 percent of businesses are “small”, and more than five million people are employed by small businesses, that’s a concern.
“You have a perverse distortion of the economy that it is more profitable for a bank to allocate capital to a weekend holiday home than it is to support a small business.”
He further commented that it was the focus of banks on equity margins that encouraged lending for mortgages, or to the big corporates, not smaller businesses.
“There is a huge pressure on growing return on equity, but that risk is you get that unintended bias of people saying ‘let’s take that capital in the economy and allocate it to the highest ROE asset class’, which is the household lending,” he said.
“That’s great for the bank and bankers in the short term but it is not necessarily in the national interest in the long term.”
Making it more attractive for banks to lend to smaller businesses could make a dramatic difference not just to the business owners themselves, but to the national economy overall …The next challenge for the regulators.
