Credit shakeup to give small business owners better access to funding

- September 25, 2020 5 MIN READ

The Australian Small Business and Family Enterprise Ombudsman Kate Carnell says an overhaul of lending laws proposed by the Federal Government would offer a necessary funding injection to the small business sector.

Under the plan announced today by Treasurer Josh Frydenberg, lending laws will be changed to lift onerous barriers to small businesses applying for loans.

Access to credit is critical for small business

“Access to finance is critical to small business survival, particularly as support measures are tapered over the coming months,” Carnell said

“The reforms outlined today would give small businesses the confidence they need to seek funding to get through this crisis, so they can grow and employ.”

Carnell suggested small businesses have been facing a credit squeeze since well before the Royal Commission revealed the uphill battle they faced to secure funding from banks.

“Even in the best of times, many small businesses struggle to secure finance, with a recent Sensis report revealing that of the dwindling number of small businesses that applied for a loan in the three months to August, about one in four had been knocked back. There’s a good chance the onerous small business loan application and bank assessment process is partly to blame.”

What is Frydenberg’s plan?

Under Frydenberg’s plan, the government will roll back responsible lending obligations and place the honus on borrowers rather than lenders to ensure due diligence around the capacity of a borrower to repay a loan.

The Morrison government believes the changes will increase the flow of credit allowing small businesses and the economy to bounce back from the impact of COVID-19.

“As Australia continues to recover from the Covid-19 pandemic, it is more important than ever that there are no unnecessary barriers to the flow of credit to households and small businesses,” Frydenberg said.

“By simplifying the loan application process for borrowers it will reduce barriers to switching between credit providers, encouraging consumers to seek out a better deal. Maintaining the free flow of credit through the economy is critical to Australia’s economic recovery plan.” the treasure said.

Frydenberg’s plan still ensures a certain amount of accountability for the banks, with ASIC and the government pledging protections for vulnerable borrowers such as those on Centrelink benefits.

“ASIC will also have the power to impose penalties for prohibited or excessive fees and interest charges, small business ombudsman Kate Carnell said.

“Small business borrowers should always ensure their lender is an AFCA member and to go their trusted accredited financial adviser before taking out a loan.”

Simplifying loan process welcomed, by some

The move to simplify Australia’s credit framework has been welcomed by the Customer Owned Banking Association (COBA)  with teh organisation suggesting it will provide timely access to credit for many.

“We look forward to seeing the detail of the Government’s proposals but the objective of simplifying unnecessarily complex regulation has our strong support,” said COBA CEO Michael Lawrence.

“Customer-owned banking institutions have always been responsible lenders – putting our customers first is part of our DNA. We certainly don’t need prescriptive and complex laws to make sure that we lend responsibly.

Lawrence said the government is right to take decisive action to promote lending during the biggest peacetime economic contraction since the 1930s.

“This environment requires policymakers and all stakeholders to bring a new lens to all regulatory settings. There are multiple layers of regulation applying to lending so simplifying these regulations while maintaining strong consumer protection, particularly for vulnerable consumers, is very welcome.”

Consumer groups blast the government for relaxing loan conditions

It is expected the policy relaxation will make the process of applying for loan simpler. Yet not all members of the finance sector are in agreeance that it is wise.

CHOICE, Consumer Action Law Centre, Financial Counselling Australia and Financial Rights Legal Centre have responded to the Government’s announcement that it will remove credit protections for borrowers saying right now what people need is more income, not more debt.

CHOICE suggests the government’s proposed reforms will remove bank responsibility to customers, opening up new opportunities for banks to aggressively sell debt.

Karen Cox, CEO of Financial Rights Legal Centre and opening witness to the Banking Royal Commission commented:

“The problem people are having right now is too much debt and not enough income. The Government’s solution is to take on more debt with fewer protections. Unsustainable debt hurts real people and is a short-sighted fix for a flailing economy.

“Watering down credit protections will leave individuals and families at severe risk of being pushed into credit arrangements that will hurt in the long term,” Cox adds.

“Our service has helped thousands of Australians drowning in debt and we continue to see legacy debt that predates the Hayne Royal Commission. How can we have so quickly forgotten the hard lessons from the GFC and the Hayne Royal Commission?”

What about the fintechs?

Leica Ison, CEO of regulation technology provider SKyjed, said relaxing the lending criteria is being rightfully met with some concern amongst consumer protection groups with the move back to ‘borrower beware’ lending criteria.

“But in our view, it’s the banks that still need to be aware, and they still have the most to lose. The regulatory environment today is far more stringent and complex, and provides a much more robust safety net for consumers. Banks should not fall into the trap of not understanding target market determination and ASICS’ DDO requirements even as lending criteria relaxes,” Isson said.

“Poorly targeted products will be investigated. The Westpac settlement of $1.3Bn yesterday is still fresh in the mind of bankers, and AUSTRAC spent a good deal of time signalling to the market that they are on the hunt for more high profile cases. Whilst the move is certainly a positive for growth as we recover from COVID, there is every reason to believe the banks will be treading far more cautiously with their product governance this time than they have in the past.”

Several alternative lenders have welcomed the news with Yanir Yakutiel, CEO of alternative lender Lumi describing it as a very positive move.

“It will allow banks and institutions to make decisions based on the merit of applications as opposed to being shackled by regulations. Any relaxation of this cumbersome red tape is a good thing and should be encouraged.

“Increasing access of credit into the market will be beneficial for the Australian economy, and broadly speaking, it is also something Lumi will benefit from. Relaxing constraints on lending will to a large degree impact lending for residential mortgages and have less impact on commercial lending. Anything that will increase the flow of credit into Australian households and help prop up the economy is very positive.”

Arun Maharaj, CEO of HashChing agreed, describing the proposed rollback as a positive step forward for the fintech industry.

“The changes will speed up processing times, making things more efficient for all involved. Consumers on our platform are increasingly looking for faster approval times, and these changes will certainly make it easier for our brokers to deliver on this.

“Almost every industry has in some way been affected by the pandemic, and brokers are no exception. I’m confident that these changes will help to bring some positive relief in what has been an exceptionally difficult year. Brokers will be given the ability to be even more productive and effective in their dealings with customers, which is exactly what we aim to offer at HashChing.”

Kochie’s view

Small business and personal finance expert David Koch suggests the credit system has become clogged as banks put borrowers through the “credit wringer”.

“…Stringent criteria, forensic analysis of information and conservative policies. As a result, the loan process was slowed and borrowing hard to secure. In other words, the credit system became clogged… the pendulum swung too far at a time when more money is needed in the economy to fight the recession and save jobs and businesses.”

Koch said even the Reserve Bank had complained the conditions for borrowers were far too tough.  He suggests this week’s announcement by the Federal Government to ease the regulations on bank lending will allow lenders to release credit more freely.

“Overall it’s a good move… except if borrowers start lying on their applications again and getting themselves into trouble.”

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