Where's the value in a rate cut?

The kerfuffle that has broken out over the big four's latest rate moves misses the point – a reduction in the cost of money is irrelevant if no one can get access to it.

There’s been a big commotion about the major banks and their decision to cut rates in line with the Reserve Bank, but why is everyone assuming the banks actually want to lend money? And to whom does the extra 25 basis points matter anyway?

What scares me about the banks’ failure to pass on rate cuts is this: why would they put themselves through the negative PR of delaying decisions on rate movements unless they have a very good reason to sit pat? My guess is that the banks in Australia are placing a heavy weight on what is going on in Europe. So instead of asking, ‘why won't the so-and-sos pass on the 25 points’ we should be asking ‘what do these people know that we don’t?’

Furthermore, what difference does the extra 25 basis points make? I ask this question with my small business hat on. Sure, if the rate cuts were passed on to households, and the households spent the money, then many a small business stands to gain.

Lower interest rates on their own loans would be of assistance to small businesses, but most can’t get their hands on any money from their banks anyway, so the price of the money is a secondary consideration.

As to the badgering the banks are receiving from the treasurer – this is laughable. In the last round of rate cuts, Wayne Swan hectored NAB for holding on to some of the rate cut, even though they were still cheaper than the other major banks.

This time he is parading the fact that, with his reforms, it is easier to switch home lenders. But does he seriously expect us all to switch home loans every time there is a rate cut? These are home loans, not bananas at the fruit market. And can you imagine small business owners switching banks every time the RBA moves rates? Come on.

In any case, a lot of small business owners can't budge from their current lenders because even though they might be prompt payers, they fail the considerable hurdles set by the new 'responsible lending' laws.

And why is it that journalists and politicians assume that pricing is the most important consideration when it comes to choosing a lender anyway?

Last week, the Commercial Asset Finance Brokers Association (CAFBA) held its annual ‘Financier of the Year’ awards. The winner incidentally – across Australia – was Macquarie Bank, with Westpac coming in second and Capital Finance third.

CAFBA members – who consist of commercial finance brokers specialising in lending to businesses predominantly for equipment – were asked to rank lenders in four categories.

In order, the four categories were service, attitude, pricing and documentation (user friendliness).

I asked CAFBA’s former president David Gandolfo if pricing was given more weight than the other factors in determining the Financier of the Year, and he confirmed that for the purposes of the survey, CAFBA gave pricing the same weight as service and the other factors.

Gandolfo, who is also a director of finance broker Quantum Business Finance, also added that "pricing is obviously important but it is irrelevant without access to funds. Service and delivery are more important.”

So what would the treasurer say to a bank that decided to hang on to the rate cut and invest the difference in service and the other factors the brokers value so highly?

There is a lot more to money than its price – certainly from an SME perspective, in any case.

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

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