SME lending vulnerable to wholesale funding crisis, European banking exit: NAB

SMEs need to remain vigilant to the prospect of challenging financial conditions next year, Australia’s largest lender to small business says.

National Australia Bank head of business banking Joseph Healy says if European banks continue to withdraw from the Australian market and term funding markets remained closed in 2012, SMEs would compete for a smaller pool of funds.

Stressing conditions could improve quickly, Healy says in the worst-case scenario of capital markets staying closed and European banks withdrawing from Australia, credit will become a lot tighter and therefore costs will rise.

Healy tips European banks – the second-largest provider of debt capital in the economy – will continue to withdraw from Australia and says it’s unlikely North American, Japanese and Chinese banks would step in as replacement.

“I’m anticipating we’ll see a gradual withdrawal of European banks, not just in Australia,” Healy told SmartCompany this morning.

“It’s no surprise given the challenge they face raising capital,” referring to requirements they raise tens of billions of dollars despite deep investor worries about the region’s health.

“The big issue for SME lending is the crowding out effect.

“Credit availability could potentially reduce, which would ultimately have a flow-on effect on SMEs.

“If all the factors come together, we cannot discount the concept of credit rationing.”

Questioned what this would mean for SME lending, which is a higher risk and therefore higher margin segment, Healy referred to National Australia Bank’s commitment to small business during the global financial crisis.

“We continue to be committed to SMEs,” he says, referring to them as the engine room of the economy.

But Healy says the environment for SMEs is “quite challenging”, despite low unemployment, low inflation, falling interest rates and Australia’s generally strong economy.

“Some segments of the SME market are doing it really tough,” Healy says, noting businesses are shy to invest, consumers are cautious, and overall confidence is weak.

He notes that many SMEs are also battling cashflow issues and an aggressive Tax Office, and demand for credit is nowhere where it was before the GFC.

Healy says an improvement in confidence is key.

“I really do believe it’s a confidence issue. Once you get the confidence back, then a lot of the concerns will be addressed.”