Small businesses, banking and the Khoury Report
(28 March 2017 – Australia) The banking industry association has responded to recommendations from a review of the ABA’s Code of Banking Practice by independent reviewer Phil Khoury.
Recommendations in the review were similar to those made by Small business ombudsman Kate Carnell, in her report on small business lending practices.
In his executive summary, Khoury’s suggested that banks “focused as much on the challenge of rebuilding trust between banks and their customers as … on the many technical and specific fairness issues raised with me”.
Recommendations pertinent to small business included calls for an addition to the code that centers on SMEs, as well as altering the definition of small business loans to those worth up to A$5 million.
While ABA said it supports some of the recommendations for SMEs “in principle”, its member look unlikely to re-define a small business loan, with a preference to cap the loan amount at A$3 million.
“Based on bank lending data, the ABA estimates this definition would capture 97 percent of bank business customers. Businesses with total lending above $3 million tend to be larger and more sophisticated businesses,” the ABA said.
However, the association said it would instead propose a “small business test” for determining whether a company could be considered a small business for the purposes of taking out a loan. To qualify, a company would have to employ 20 or fewer people, or 100 or fewer if it was in manufacturing; have an annual turnover of $5 million or less; and not have a loan that exceeds $3 million.
According to Carnell however, the A$5 million threshold was necessary to capture all small businesses, particularly those in farming.
Other recommendations from Khoury included extending the notice period for changes to loan term agreements from 10 to 30 business days, and reducing the number of reasons a bank can use to vary those terms.
The ABA said it agrees “in principle”, however prefers 30 calendar days. The banking sector also indicated that it would like a list of exemptions through which it can vary loan terms for reasons other than a business being unable to make payments, including if the company goes into liquidation, if the company is wound up or if there are “animal welfare issues”.
According to the ABA, the sector will adopt a majority of the recommendations.
“We need to do more to help these customers through good times and bad and support them in growing their businesses,” the association said in a statement.
The SME Transaction Banking report, produced bi-annually by East & Partners shows that satisfaction, particularly for value for money among small businesses continues to decrease dramatically. Additionally, small businesses increasingly view their banking relationships as transaction based, rather than lending. Over the last three years, the latter has dropped from 68.7 percent to 48.8 percent.
“Credit, its availability, conditions and pricing has become and remains the dominant issue for SMEs. We expect this trend to continue in the near term, driving Australian small businesses to re-evaluate longstanding banking relationships,” said Martin Smith, Head of Markets Analysis at East.
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