Small Business Ombudsman Kate Carnell has floated the idea of a taxpayer-backed bank to support lending to small businesses, saying the current system is starving firms of reasonably-priced finance.
With top financial regulators also suggesting there is a need for more competition in small business banking, a new submission from Ms Carnell says regulations are pushing banks to focus on property-secured lending.
This means that unless a small business owner has a property they can mortgage, bank funding at a reasonable cost is “simply unavailable” for many firms, she says. At the same time, she says other potential financiers such as superannuation funds are also shying away from backing local start-ups.
In response, Ms Carnell says one “option” could be to look into establishing a body that arranged government-supported loans, alongside closer scrutiny of banking regulations.
The ideas are raised in a submission from Ms Carnell to a Productivity Commission inquiry into competition in the financial sector, announced in this year’s budget.
Aside from looking at banking regulations, the submission says “an alternative option is for a government-backed approach to small business lending such as the Commonwealth Government Clean Energy Finance Corporation”.
“The fund was set up because of the barriers to entry into clean energy and the need for a bank-friendly business case in order to entice banks to lend in this area. Banks and the CEFC share the risk on these loans.
“It could be a useful model for government-backed small business loans, similar to the British Business Bank.”
The UK’s taxpayer-owned bank was set up to boost credit to smaller firms after the global financial crisis. It does not lend out taxpayer funds directly, but sources finance from more than 90 businesses, including online lenders.
The submission said Ms Carnell’s Australian Small Business and Family Enterprise Ombudsman had also looked into obtaining small business finance from the $2.3 trillion superannuation sector, but funds had moved away from small Australian venture capital or private equity investments to keep their costs down.
It recommended the Productivity Commission look at whether super funds were deterred from investing in local venture capital, which could act as a source of competition for banks in SME lending.
Since the global financial crisis, Ms Carnell argues banks have become more focused on property-secured loans, which works against promising businesses that do not have assets that could be mortgaged.
Ms Carnell says one ‘option’ could be to look into establishing a body that arranged government-supported loans.
The Reserve Bank’s submission to the same inquiry said the big four banks had a market share of 83 per cent in small business loans, compared with 77 per cent of the housing loan market.
It said this market was typically less transparent than the market for home loans, making it harder for customers to know if they should switch banks, and that competition in small business lending appeared “less vigorous” than other parts of banking.
The RBA also noted that many small businesses had limited collateral for securing a loan aside from the family home, but that many banks had a “limited appetite” to lend to small businesses without sufficient equity or collateral.
“Without sufficient equity or collateral, many small businesses will receive only limited loan funding,” the RBA said.