SME credit growth faces stern property funding test
(19 March 2019 - Australia) Financial regulators are concerned that tighter mortgage lending standards and falling house prices are limiting the ability of small businesses to access credit.
Sydney house prices are now over ten percent below their 2017 peak, and Melbourne prices have dropped nearly ten percent from highs reached in 2017 according to CoreLogic data. The Hedonic Home Value Index reports that national dwelling values fell by six percent in February 2019 year-on-year, largely driven by an eight percent slide in metropolitan centres, in particular Sydney and Melbourne.
The Council of Financial Regulators (CFR) is the peak coordinating body for the country's most powerful financial regulators. Chaired by the Reserve Bank of Australia (RBA) Governor and secretariat support by the RBA, the council meets quarterly and includes representatives from the Australian Securities and Investments Commission (ASIC), Australian Prudential Regulation Authority (APRA) and Federal Treasury. It is a non-statutory body, without regulatory or policy decision-making powers.
The CFR members also said changes in the definition of small business in the banking code of practice as recommended by the banking commission are "significant". The changes are set to widen the definition of small business and afford them with better protections, including longer notice periods should the lender choose not to renew the loan. In the final banking royal commission report, commissioner Kenneth Hayne called for the broadening of the definition of a small business to any business or group employing fewer than 100 full-time equivalent (FTE) employees, where the loan applied for is sub A$5 million.
ING has announced that it will no longer accept residential property as security for residential loan applications being used for business purposes. The group’s decision comes amid concern over the availability of credit for the small business community.
"Members observed that new lending to small businesses has slowed over the past year. "For many small businesses, personal and business finances are intermingled. As a consequence, the higher standards that lenders apply to personal borrowing are affecting some small business loan applications. Further falls in housing prices could constrain small business borrowing, given that around half of loans to unincorporated businesses are secured by residential property. The council will continue to monitor developments closely and stressed the importance of lenders supplying credit to small and medium-sized businesses” read a statement released Tuesday by the CFR.