Banks should be prevented from default on loans when a small business has acted lawfully and they should provide standard form contracts and clear summaries of default loan triggers, according to recommendations from the small business ombudsman’s inquiry into SME lending.
Australian Small Business and Family Enterprise Ombudsman Kate Carnell conducted hearings with the big four banks at the end of 2016 as part of her inquiry that took a “deep dive” into lending practices that potentially disadvantage small businesses.
Carnell’s inquiry report, released today, makes 15 recommendations—four to the federal government and 11 to the banking sector—to address the overall finding that the big four banks “consistently” engage in practices that can significantly hurt some small operators.
“Fundamentally, what we’ve found is that small businesses who take out a loan, do so under the impression that if they keep up their payments, they will stay out of trouble. The reality is that this is not the case,” Carnell says.
“For example, banks may conduct a new valuation on the assets securing the loan. Now if the value is found to have fallen, the borrower faces significantly increased—and potentially unmanageable—loan costs. Banks also have the power to unexpectedly call in the loan, and demand repayment in an unrealistic timeframe.”
Key recommendations from the inquiry include that banks should provide 90 days notice to businesses on decisions about rolling over loans, and that they should be unable to default on loan agreements if the small business is keeping up their end of the bargain and delivering on payments.
“The report recommends that banks remove any loan conditions which allow them to unilaterally trigger a default based on revaluing assets during the life of the loan and invoking financial covenants or catch-all “material adverse change” clauses,” independent banking expert Neil Slonim, from The Bank Doctor, explains.
It is also recommended that banks adopt standard form loan contracts and provide a one page summary of triggers for default—a move Slonim says will help small businesses that have often struggled with complicated documents and do not understand their implications.
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“Most borrowers, when they get these big loan documents, find them really difficult to read and most don’t get advice from a lawyer,” Slonim says.
Carnell’s inquiry has also recommended the Australian Securities and Investments Commission establish a small business commissioner, as well as the formation of a dispute resolution body that would have a unit focusing on SME credit disputes up to $5 million.
Small business minister Michael McCormack and minister for revenue and financial services Kelly O’Dwyer commented on the recommendations related to dispute resolution on Friday morning.
“We will ask ASIC to provide advice to government on the current allocation of responsibility for small business regulatory matters at the commissioner level,” O’Dwyer said in response to calls for a small business commissioner.
Minister O’Dwyer has also expanded the terms of reference for the Ramsay Review into external dispute resolution (EDR) for financial services, to ask that it considers the recommendation for an EDR body to resolve SME disputes over credit.
Slonim says the recommendations do a good job of covering a number of concerns around lending, and the inquiry shows a more effective way of dealing with the problems that SMEs face now than a Royal Commission into the banking sector would have.
“There are practical and meaningful recommendations that would help,” he says.
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