Want to Know Why Queensland Business Isn’t Firing? Talk to the Banks
Australia’s banks’ preference for residential property lending in the absence of credit extended to businesses will only serve to stall economic growth over the coming decade.
Amidst a backdrop where small businesses contend with trade uncertainty, a constrained state economy and a lack of private sector projects, a CCIQ analysis of lending levels reveals that for every 10 dollars lent in Australia, less than three are for commercial purposes.
An overreliance on residential lending is fuelling a hike in demand for unproductive assets, while at the same time booming volumes of personal debt underpin a view of a banking sector that has lost touch with the fact that small businesses ultimately drive the national economy.
The Suncorp-CCIQ Pulse Report for the December 2018 quarter featured a Hot Topic on the Financial Services Royal Commission (Royal Commission).
Commencing on the 14th of December 2017, the investigation was commissioned to examine the large volume of complaints regarding industry practices within the financial services sector, predominantly the banking sector.
The Federal Treasurer, Josh Frydenberg has indicated that of the 54 legislative recommendations 50 are expected to be implemented or subject to legislation by mid-2020.
Given it has been more than six months since the public release of the final recommendations, business sentiment readings continue to reflect tight credit conditions for small and medium size businesses in Queensland.
So, what is the general sentiment of businesses toward banks and the Royal Commission?
The December 2018 Pulse poll asked participants whether they believe the Royal Commission would have any impact on the customer focus of Australian banks.
More than three quarters of respondents were doubtful that there would be any change in the customer focus of banks and almost one quarter expected the current banking culture to continue with business as usual.
An overwhelming number of businesses (86%) indicated they feared that increased compliance requirements would reduce bank appetite for small business lending.
Looking at the data compiled by the Reserve Bank of Australia indeed shows lending to small businesses has been relatively lax for some time and that there has been a moderation in growth of small business lending compared to larger businesses in recent years.
Businesses overwhelmingly reported that they expect broader ramifications as a result of the Royal Commission with 84% of respondents anticipating economic growth to wane.
ABS statistics show that tighter credit conditions for SMEs has coincided with declining capital investment in the state when looking at measures of economic activity in the state over the past 5 years.
Year-on-year to March 2019 there has been an annual reduction in gross fixed capital formation of around 2% in Queensland, driven chiefly by falling business investment and commercial/engineering construction in the state.
Despite the gloomy outlook of businesses regarding future credit conditions, most businesses indicated that they had not experienced significant changes to their existing credit facilities at the time of the survey.
However, of those that did report changes, 12% sighted a change to loan conditions, 9% indicated there had been a change to limits on their lines of credit, while fortunately only 1% having existing facilities called in or cancelled.
Respondents cited other conditions including a change in the lending focus of their financial institution, vexed credit check processes as well as changes to collateral requirements.
Small businesses rely predominantly on borrowings from banks in order to hire more staff, make investments in plant and machinery and for working capital purposes.
Accordingly, 26% of businesses reported applying for credit at some time over 2018 to invest in new equipment, 25% wanted to expand existing operations, 19% applied for refinancing, 10% wanted funds to pay bills and other expenses and 7% wanted funds to employ more people.
Businesses that applied for loans for other reasons included purposes such as business expansion, business acquisitions and building purchases.
Over the year, 4 in 10 businesses said they had applied for credit with the Big Four banks (CBA, ANZ, NAB and WBC) yet it appears that in many cases open-handed business met with a closed-fisted banking sector.
The fact only about one quarter of respondents that applied for new loans or to refinance with the Big Four were successful portrays a banking sector that is apathetic to the needs of Queensland’s small business sector.
For reasons likely relating to the falling supply of business lending, a growing number of SMEs have sought finance from alternative sources than the Big Four banks.
30% of respondents reported seeking finance from smaller banks, 21% engaged with non-banking financial institutions such as mutuals, 18% tapped private equity, while 16% of respondents reported using more innovative approaches to finance such as FinTech, Crowdfunding as well as Payday lenders.
Despite 60% of respondents reporting a limited understanding, it is reasonable to assume that as FinTech offerings grow, so will its adoption in many small businesses.
While only 3% reported sourcing from crowdfunding, this is forecast to be a growing source of funds with ASIC recently passing the Corporations Amendment (Crowd-sourced Funding) Act 2017, which provides a legislative framework for public fundraising.
Many respondents who reported other sources were businesses that did not have any existing business loans, while some had engaged with finance brokers, used their personal or family’s funds as well as equipment suppliers funding, machinery financing, invoice financing (i.e. accounts receivable financing) and grants.
Considering lending aggregates for Australian banks at June 2019, it is not surprising that Pulse respondents continue to report that banks are indifferent to supporting the small business sector.
Data from APRA clearly highlights a strong concentration bias toward lending for residential housing which makes up over 70% of total lending, which is in direct contrast to foreign banks operating within Australia which are contributing a mere 11% of aggregate lending in Australia and whose loan book is largely representative of corporate lending.
It is not surprising businesses feel that way considering a close inspection of bank loan portfolio concentrations reveals an Australian financial system top heavy with what are essentially building societies rather than banks.
Given that no statistics on business sentiment around banking culture were gathered prior to the Royal Commission it is not possible to compare readings over time; nevertheless, it is evident that banks have tightened lending standards and remain cautious about providing credit to small businesses.
Further, it is reasonable to suggest that diminishing access to credit has contributed in part to weak business conditions and sentiment readings from the Queensland small business community more generally.
For business conditions to improve there is clearly a genuine need to increase accessibility to business finance and reduce the rigidity of business lending practices.
This is especially true for tightened lending activity that has particularly discriminated against young, aspiring businesses which, for example, have less than two years ABN activity, a lack of prior industry (or self-employed) experience or do not have securable assets.
With credit facilities including credit lines and term loans being considered a necessary component of business productivity, it is necessary that unreasonable conduct with respect to amendments to existing contract conditions is limited.
This will provide certainty for Queensland SMEs, which do not hold direct access to money markets and whose business models rely on these facilities for daily cashflow requirements such as those with seasonal workflow.