Timely $2 billion boost to small business loan market welcomed by industry

Wednesday 14 November, 2018 | By: Marcus Smith

The Morrison Government has announced a $2 billion injection into the small business loan market, a first-of-its-kind effort to enhance the attractiveness of SME lending by financiers which the Federal Government acknowledges is difficult to find and too expensive.

A government-backed intervention, Treasurer Josh Frydenberg has announced the creation of a taxpayer-backed securitisation fund which invests in SME securitised bonds with a view to increasing the origination of small business loans by regional and non-bank lenders.

CCIQ’s Chief Economist, Dr Marcus Smith, says the initiative stands as an ideal option to “kickstart the small business loans market in Australia, which lacks sufficient competition at present”.

“The plan is expected to incentivise the origination of more small business loans as demand for securitised bonds from the new Australian Business Securitisation Fund increases.”

“Ideally, the additional liquidity provided in the securitised loan market will further attract other institutional investors as well, such as superannuation funds and insurance companies seeking higher duration assets.”

Dr Smith explains that when securitisers know there is adequate demand for the bonds, this gives them an incentive to originate more loans to produce more securitised bonds.

 “Of course, given the inverse relationship between the price and yield of financial securities, the increased demand should push up prices and thus decrease yields on the securitised bonds.”

“This, in turn, should then put downward pressure on interest rates on loans originated in the underlying small business lending market.”

Small businesses have welcomed this increased competition against the big four bank which comes at a time of deteriorating business conditions.

Over the past two years, the national securitisation market for unsecured SME loans was worth only about $125 million, compared to total securitisation issuance of about $96 billion for mortgages, car loans, personal credit and credit card debt.

Dr Smith highlights some of the risks with the new Fund, pointing out that the Government must keep a close eye on unscrupulous lenders who knowingly pass on unacceptable risk to investors.

“It is certainly a good thing that the  government intends to minimise taxpayer risk by investing in highly rated securities and consulting with credit-rating agencies.”

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