Small firms face higher rates

ERIC JOHNSTON The Age www.theage.com.au

July 8, 2010

THE big banks are likely to push through further interest rate rises to small and mid-sized business customers as part of efforts to recoup funding costs.

Higher rates will be a further setback for the sector, which remains fragile. Many small and medium businesses have found it tough to secure financing over the past two years as profits have fallen away.

A joint review of lending to small and mid-sized business by investment bank JPMorgan and finance consultants Fujitsu Australia has found the big banks have significantly tightened their grip on the sector as smaller players faced funding constraints, or pulled out of the market entirely.

JPMorgan’s Scott Manning said banks’ average cost of funding would keep rising over the next five years, which was likely to spur rate rises for small business beyond official moves in the cash rate.

”As the cost of funding stays high for the banks themselves, they’ll be looking to pass on that burden to the sector,” he said. ”This means the rates for this sector will remain quite high”.

With lending to small and mid-sized business attracting less political scrutiny, banks will find it easier to push through out-of-cycle interest rate rises.

Mr Manning said that while there were signs that higher interest rates paid by such businesses had helped subsidise bank mortgage books at the start of the credit crisis, more recent rate moves reflected higher credit costs and repricing of risk.

He made the comments as Financial Services Minister Chris Bowen yesterday released a green paper canvassing whether small-business borrowers should be given the same degree of protection as consumers under credit rules. Credit regulation for small business is made up of myriad state and federal rules and self-regulation.

Since the onset of the financial crisis, the big four lenders have made similar inroads into lending to the sector as those made into the mortgage market, increasing their combined share to more than 90 per cent.

Small to mid-sized business makes up about 20 per cent of the lending book of most big banks.

With most small businesses paying interest rates above 8 per cent and many facing interest charges in the double-digit range, lending to the sector is slightly more profitable for banks than mortgages.

But banks have been reluctant to turn on the lending tap to the sector because the rate of losses continues to rise. The report also found that the level of small-business loans turning sour would continue to rise, but more slowly than in the past two years.

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