New data from the Reserve Bank of Australia has confirmed what many in the small business community have long suspected – banks are increasing their profits by turning the screws on SME customers.
After a week in which several banks increased their mortgage rates, claiming that funding costs have increased, the RBA’s special bulletin has called this claim into question, with the Reserve claiming the banks’ interest margins are now back to where they were before the financial crisis.
“Overall, banks’ net interest margins have risen a little recently, offsetting the fall that occurred in the early part of the financial crisis,” the RBA states in its bulletin.
Despite protestations from politicians and consumer groups, mortgagees have actually been treated rather well by the banks.
Since September 2008, the RBA has cut official interest rates by 4.5% and the average mortgage rate has fallen by 3.3%.
On the other hand, lending rates for small businesses have fallen by just 2.3% and there is also clear evidence that lending criteria has tightened significantly.
“Banks have cut variable housing loan rates more than the fall in their cost of funds, but reductions in business lending rates have been less,” the RBA says in its typically understated way.
Greg Evans, acting chief executive of the Australian Chamber of Commerce and Industry says that while interest rates are a big concern for small business, everyone should be worried about the flow-on effects if SMEs cannot invest in growth and jobs.
“This is an issue that we’ve been indicating as a problem for SMEs for some time. Ultimately it has an economy-wide impact.”
While Evans would like to see the Government increase pressure on the banks on behalf of business lenders, he’s also concerned about the diminution of competition in the finance sector, since smaller non-bank lenders, foreign banks and specialist finance companies have departed the market.
“Our concern is that with competition deteriorating in the market, when we come to an economic recovery that could be a major issue.”
Evans is particularly worried about the risk premiums that are being placed on top of already high small business loan rates. Evans believes the banks have cut many of the specialist small business lenders and are simply applying general rules across industries.
“The really don’t understand that nature of the businesses they are lending to. It’s basically a result of banks being under pressure to cut costs and they’ve lost some of those skilled specialists in the small business area.”
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
