Call for increase in small business lending protection

The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, has questioned Commonwealth Bank’s commitment to small business lending reform following evidence to a parliamentary select committee.

Ms Carnell said it was good that banks have finally committed to complying with unfair contract terms legislation, but the lending threshold should be $5 million instead of the $3 million they have agreed.

At the Select Committee on Lending to Primary Production Customers in Sydney on 11 August, the Commonwealth Bank spokesman said:

“Certainly, insofar as the discussions we had with Ms Carnell, we had a debate and a discussion around that. We feel that $3 million is a lot of money. Beyond $3 million, it is starting to get into a very serious amount of exposure. We are very mindful that, obviously, as we lend more money, the risk to our organisation increases in absolute terms. The higher you push that threshold, one of the unintended consequences could be that the banks start to withdraw from the market. Why we feel $3 million is appropriate is that it tries to strike that right balance to achieve for the small business customers and provide greater certainty but also does not have the intended consequence of withdrawing liquidity from the small business market.”

Ms Carnell accused CBA of scaremongering.

“Despite repeatedly asking, we have never received a properly justified explanation of why $5 million is such a problem, even when they have acknowledged that this is a very small percentage of small business loans (above $3m),” she said.

“Threatening to withdraw liquidity from the small business lending market is a sledgehammer approach that’s farcical and has no justification given the low number of small business loans involved in going from $3m to $5m.”

Carnell said the banks’ own independent expert adviser on the ABA Code of Banking Practice review, the Financial Ombudsman Service and the Government’s response to the Ramsay review on external dispute resolution had all identified a credit facility of at least $5 million as an appropriate threshold.

“By their evidence to the committee, CBA is suggesting that ethical values and best practice don’t apply above a reasonable limit, which is absurd,” she said.

In response CBA pointed out that they were the first of the banks to simplify loans for small businesses, referring to a statement in April in which their Business and Private Banking Group Executive, Adam Bennett, said, “We are simplifying our small business loan terms and conditions to make it easier for our customers. For almost all of our small business loans, financial indicator covenants will no longer be included in loan contracts and therefore will no longer be a possible cause of default. Even though we very rarely used these covenants as a reason to foreclose a loan, this means that we will be removing all references to them in our small business loan contracts where our exposure to the customer is below a value of $3 million. We are doing this for all new and existing qualifying customers to provide greater transparency and certainty for small business.”

On the subject of the level of the threshold, CBA stated that over 95 per cent of their small-business customers have loans of $3m or lower, and that the vast majority of their customers, therefore, were covered with the new level of small business lending protection.