SME lending will be hardest hit by international banking changes: Expert

Small and medium-sized enterprises will bear the brunt of global banking regulations designed to prevent another financial crisis.

That’s the opinion of Professor Ian Harper, partner at Deloitte Access Economics and member of the Wallis Inquiry into the financial system in the ‘90s.

“The biggest loser will be SMEs because large institutions can go direct to the bond market to raise fund,” Harper told a conference in Sydney yesterday, according to the Australian Financial Review.

Harper’s comment follow warnings from the chair of the Australian Bankers Association, ANZ chief Mike Smith, that the rules requiring banks to hold more capital and higher quality assets could crimp the global recovery.

ABA chief Steven Munchenburg says Harper is raising a real issue of how to balance the trade-off between the freedom with which money flows and stability.

While cautioning against sweeping generalisations on the likely effect of the regulations, Munchenberg says nonetheless there’s no doubt that SME lending is riskier than residential lending.

“At the moment, there’s no evidence that small business is having trouble accessing loans; what demand there is, is being more than met,” he says.

Peter Strong, executive director of the Council of Small Business, says there are concerns about red-tape and processes within the banks that will make it harder to lend to SMEs as the capital and liquidity rules take effect.

“From what I can gather, it’s going to be about having more money on reserve for business loans, and when there’s a higher risk profile there’s a higher duty of care on the banks which adds to their processes,” Strong says.

“Because of the theoretical higher risk of the small business loan, it means that their due diligence is going to be more complicated.”

Kevin Davis, research director at the Australian Centre for Financial Studies, says although it’s certainly true that SMEs can’t access bond markets, few companies outside the top do so anyway.

“I think there are others ways, with banks packaging up loans to SMEs and securitising them, getting them off the balance sheets that way,” Davis says.

The comments come as banking research and advisory firm East & Partners tips small business will dominate deposit volumes through 2012, and continue to shun borrowing due to a lack of confidence about their short-term future and unfavourable terms.

In its 2012 outlook, East & Partners principal analyst Paul Dowling tips a “further year of very careful behaviour by business customers, accompanied by an absolute focus on margins and profitability by the banks in store for these markets.”

“We will continue to see two, two-speed economies in evidence – resource versus non-resource business and big versus small customer behaviours differentiating themselves.”