The SME credit mirage

Should a bank be in the business of acquiring financial assets avoiding risk, managing yields and minimising overheads, or should they instead be in the business of participating in mutually profitable business relationships when they are dealing with a small business?

That's a key question that needs to be asked after two of Australia's largest banks signalled they would be increasing their focus on the small business lending market by lowering rates or cutting fees on some small business loans, rather than making lending easier to access for small business owners.

Last week the Commonwealth Bank of Australia said it was shifting its focus to the small business market with the bank's executive general manager of business banking, Ian Narev telling The Australian that the bank would aim to boost its market share in small business lending by competing on loan pricing.

CBA, whose small business book grew by 8.3 per cent over the past year, already has the lowest rates on a small business residential-secured loan, at 7.86 per cent. NAB's rates for the same loan is 8.68 per cent, Westpac's 8.69 per cent and ANZ's 9.12 per cent.

In the world seemingly inhabited by the CBA, helping SMEs is all about cutting their interest rates on residentially secured loans. So a $100,000 residentially secured business loan with the CBA will cost a small business borrower $820 a year less than residentially secured loan with NAB.

But what if a business really needs an extra $50,000 to make the most of whatever market opportunities it is presented with?  $50,000 for example, if invested in stock that turns over six times a year with a mark-up of say, a modest 50 per cent, would represent a potential increase in sales of $450,000 and another $150,000 per annum in gross profit.

What do you think an SME proprietor would prefer? Having the ability to save $820 per annum, or the ability to invest a little extra money in the business and boost gross profit by the $150,000?

CBA is not alone in making a virtue of low pricing in its SME offerings. NAB for example last week cut a $20 fee from its internet business banking account, although in fairness to the NAB, this has probably got as much to do with its strategy of leading the other banks on transparent pricing as anything. It does, however, only represent a $240 yearly saving for a small business owner.

My point is that it is all very well to tout your small business lending credentials by shaving your pricing on well-secured loans and services, but if we are going to be fair dinkum, what this is really about is competition among the banks for the cream of the SME crop. The business that values marginal pricing difference is the business that has no difficulties accessing credit – that is, the business with a strong credit profile and abundance of available security.

Further, the prevalence of "mine's cheaper than yours” in bank marketing communications to the SME sector is also symptomatic of a banking sector that is in the business of acquiring financial assets rather than engaging in financial partnerships.

In the US last week, Federal Reserve chairman Ben Bernanke implored banks to get loans flowing again to credit worthy small businesses, noting that small business lending was in decline even though the economy in the US is improving.  Note that he did not plea with banks to shave their lending margins. He just wants them to lend.

Is the situation described by Ben Bernanke in the US prevalent here in Australia? Well, that depends on who you ask. If you ask economists and politicians, the answer will be no (based on most musing in the media anyway) If on the other hand you ask Joe or Josephine Shmo, the SME proprietor you will get a very different answer.

Nick Samios is a regular contributor to Business Spectator and managing director of Hermes Business Capital www.hermescapital.com.au