Banks aim to make loan changes

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Businesses with more than 20 employees would not be deemed a small business under the banking code of practice, under a new Australian Bankers’ Association definition

The ABA has responded to the Australian Small Business and Family Enterprise Ombudsman’s report into small business lending, saying banks will reduce the number of circumstances under which they can call in a loan.

ABA Chief Executive Anna Bligh says the industry supports the Ombudsman’s recommendations for more transparency around how banks work with small businesses

“Small businesses play a pivotal role in our national economy and in local communities. It’s important they can readily access affordable finance to invest and grow,” Ms Bligh says.

“Banks recognise they need to improve lending practices so small business customers have more certainty and can better understand loan terms and conditions.

“There will be a reduction in the number of specific events that could result in enforcing a loan. This means banks will no longer be able to call in a loan when small businesses are acting lawfully and making their payments on time, other than in exceptional circumstances.

“For new or renewed contracts, banks will expand the definition of small business beyond what is required by law so that ‘covenant light’ contracts apply to businesses with total loans under $3 million. This will be done by no later than the end of 2017.

“Banks will also give more notice to customers of changes to loan conditions and decisions on rollover.”

But in its response the ABA also says that a business is “not a small business” if one of several conditions is met:

  • the number of employees is 20 people or more, or 100 people or more if the business is, or includes, the manufacture of goods (full-time equivalent); or
  • annual business turnover is $10 million or more; or
  • total credit exposure (TCE) of the business group, including related entities, to all credit providers is $3 million or more.

Small business ombudsman Kate Carnell expressed disappointment with the banks’ response.

Ms Carnell, a former pharmacy owner, says the ABA response is “feeble”.

“The ABA’s very restrictive definition would mean that any business with more than 20 employees would not be deemed a small business under the banking code of practice,” she says.

“Equally restrictive and unworkable is their approach to their $3 million loan limit. The ABA is saying that any business that has aggregate loans above $3 million, including loans with ALL financial institutions and including ALL associated entities, will not be treated as a small business.

“This would mean that all loans taken out by directors of the business and their partners would be aggregated to determine if a loan taken out by the small business would be able to access the removal of non-financial default clauses and the other recommendations of the ASBFEO Report.”

Ms Carnell says this would exclude a very large number of small businesses and make a nonsense of the ABA’s claim that its response will cover 95% of business customers.

“I will be asking the ABA how they came up with this figure,” she said.

“The ABA talks about ‘covenant light’ loan contracts with small businesses—ASBFEO recommended that ALL non-financial default clauses should go except for situations where the small business breaks the law or goes into liquidation.”

Ms Carnell says the Commonwealth Bank’s undertaking last week was a better response than the ABA’s “feeble effort”.

“We think the ABA should go and talk with the Commonwealth Bank to consider its approach and go back to the drawing board.”

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