In recent weeks we’ve seen the Federal Government’s stimulus package working its way through the economy - and while not all of it is hitting its mark it seems, anecdotally, that some businesses have been buoyed up by the extra consumer spending. Businesses that operate in the ‘discretionary spend’ category, which would normally be hardest hit in a recession, seem to have particularly benefited from the spending stimulus. We can only hope that this results in more than a transitory boost to business given the enormous cost to the community. When such a huge effort is being made by the Government to avoid a deep recession it would be good to think that other sectors are also doing everything possible to keep the economy moving. Unfortunately that doesn’t seem to be the case.
It’s easy to point the finger at the banking sector but from what I’m seeing there are some real problems with the way in which the banks are dealing with their SME clients in particular.
In the first place they have cut the supply of funds to SMEs. I know that there is a global shortage of funds but surely solid, successful SMEs should be given a higher lending priority than they currently have. They are, after all, the engine room of the economy.
As banks have shed staff, especially at middle management, many relationship managers have ‘disappeared’. This has left many SMEs without their point of contact at their bank and, importantly, much of the knowledge of the business and its management has left the bank. While a new relationship manager is normally appointed this person often has an increased work load and little time to get to know his/her new customers. This means that the business has lost its relationship with its bank at a time when both the business and the bank most need it.
Some settlement deadlines are not being met by banks and they justify it on the basis of a shortage of staff.
Whether as a result of the banks’ general state of anxiety or loss of staff, or both, businesses seeking finance for new equipment or acquisitions are having to wait longer for a decision from the bank - sometimes many months. This can cost the business dearly in terms of lost production, lost efficiencies and lost opportunities.
Businesses are complaining that the constant monitoring and excessive reporting demands of the banks are taking up management time that really needs to be spent running the business. This seems to be the case even with long-term profitable bank customers.
Falling asset prices are causing their own problems with loan to value ratios. The fact that banks are lowering their required ratios is just compounding the problem and it’s hard to see that a general reigning in of facilities at this time is ultimately going to achieve anything. Where are businesses, especially SMEs, supposed to find additional funding to repay facilities? Forced asset sales at this time are only going to drive markets down further and raise loan to value ratios even more. Closing down businesses which could survive if existing financing facilities were retained, is hardly the best way for loans to be repaid - adding to unemployment, removing businesses and their employees from the tax system and losing an ongoing bank customer doesn’t make any sense. At best, the outcome of reduced LVRs is to load businesses with high risk margins, with the result that many SMEs will receive little benefit from the historically low interest rates.
Some businesses have reported that, when finance applications are approved, that approval has come with a sting in the tail. Unduly onerous lending conditions and covenants have appeared too late in the process to look for alternative sources of finance. Complaints to the bank have been answered with “Well, what can you do about it?”. This attitude is a long way from the aggressively competitive unconditional lending we saw just a short time ago. Taking unfair advantage of the current credit crisis to load good long-standing customers with unnecessarily draconian conditions is a short term view that those banks deserve to have backfire on them. The customers they are doing it to will remember when the economic pendulum swings back. No business can abuse a relationship and expect it to remain intact afterwards.
Most SME owners I know are working hard to keep their businesses operating profitably and efficiently while trying to retain as many staff as they can - often foregoing their own drawings in the process. While the banking sector is going through a period of unprecedented problems and has to focus on its own survival, too much internal focus can be extremely damaging - no business should forget that success comes from catering to the needs of its customers. Much of the stress and frustration that SMEs are currently experiencing in their banking relationships is unnecessary - more than can be justified by the global shortage of funds and higher financing costs. Such poor service is not deserved by businesses that are doing everything possible to emerge at the other end of the economic downturn in good, or even better, shape; businesses that banks will then compete with each other to have as customers.