There seems to be a quiet war of words going on between the SME sector and the banks about who is to blame for the current low level of lending to SMEs.
The head of the retail and business banking division of one of the Big 4 banks was reported in the Australian Financial Review on 24 August 2010 as saying he was ‘annoyed at the sentiment that we're not out there to lend to the (SME) sector'. He attributed the fall in lending to a drop in demand and stated that he'd never been able to find someone who had actually experienced credit rationing.
Such statements do little to placate an equally annoyed SME sector and far from reflect the full picture.
There is no doubt that the GFC left business borrowers somewhat gun-shy over debt. The threat, and in some cases, the reality, of falling revenues in a global recession turned the focus of business owners onto costs and, with rising interest rates, the need to contain debt levels.
That being said, with profits and cash flow under threat there are few businesses with the capacity to significantly reign in their debt, however much they may want to.
And yet, in many cases, this is what their banks have been requiring. Banks are no long comfortable with the cash flow lending they were only too enthusiastic to throw at their SME customers three years ago. Even premium customers whose debt is fully secured by commercial property are finding that their banks have developed an aversion to what was, until recently, regarded akin to blue chip security and are asking for debt to be repaid.
Should the banks be able to reign in facilities simply because of a change in their own policies, where the customer has not defaulted, has not breached any covenants and has had no significant decline in turnover or profitability? Obviously they have the legal right under their lending terms to do this, but morally it sits very uncomfortably.
Knowing the banks' new attitude to lending it would be no surprise if business owners were deterred from applying for new facilities. Unless the debt can be mostly supported by bricks and mortar (preferably not commercial) any finance application is likely to be unsuccessful and no one wants the stigma of having a finance application turned down.
The fact that businesses may be deterred from applying for additional funding should not be interpreted as absolving the banks from responsibility for the fall in lending to SMEs. Being deterred from applying for finance should not be interpreted as not needing or wanting finance. It's a bit like saying you have a house for rent but it's only available to tenants who can provide a personal reference from Mother Theresa and who are prepared to pay twice the normal rent.
Where some SMEs have seen market opportunities and gone to the trouble of making applications for finance to their bank, there may not always have been a resounding ‘No' – instead a resounding silence. One SME owner I know applied for acquisition funding and received no response after 9 months, despite continuous follow up. In the meantime the opportunity, not surprisingly, passed. Was he refused funding? Well, not technically – the bank simply did not make a decision.
The banks have recently been cranking up their advertising campaigns aimed at the SME sector, promising to understand their SME customers' businesses.
What they need to understand is that SMEs want to see that the banks are prepared to put their money where their mouths are. And while no one wants the banks to lend recklessly, there needs to be an easing of the current attitudes to allow a reasonable level of cash flow lending.
While SMEs have borne a disproportionate increase in their borrowing margins most business owners accept the reality that global funding is scarce and margins have had to reflect that.
What is harder to accept is the imbalance in the allocation of those scarce resources in favour of large business and residential borrowers. Whether or not this reallocation is deliberate, and let's accept for a minute the banks' assertions that it isn't, it is still no doubt, to a large extent a result of the banks' change of policy towards what is acceptable security and their lack of response to their customers since the GFC started – exacerbated in many cases by the wholesale shedding or shuffling of relationship managers which deprived businesses of their line of communication with their bank.
While there is no doubt that the banks have been far more supportive of businesses than they were in the early 90s we also need to remember that there was then, in fact, a recession. In contrast, the GFC did not produce a recession in Australia. From what I have seen most businesses have largely managed to preserve their turnover, profitability and cash flow.
Surely there was no need for lending criteria for businesses to have changed to the extent they have. When the banks seek to explain the fall in lending to SMEs, this is a factor they should acknowledge.