Have “responsible” lending practices come back to bite?!

When the COVID-19 pandemic caused an Australia-wide lockdown in March this year, both Federal and State Governments were quick to implement stimulus and policy intervention to support struggling businesses. One stimulus measure is the SME loans guarantee scheme, which involves the Federal Government accepting 50% of the risk on unsecured loans to SMEs from approved lenders.

Not surprisingly, and despite the scheme being extended until June 2021, there has been little take up – with approved loans under the program totalling only $1.5b of the $40b loan capacity under the scheme. While reasons for the low rate of take up may reflect a lack of willingness to take on more debt during incredibly uncertain times (which still has to be repaid one day), perhaps the bigger reason may lie in the fallout from the Banking Royal Commission.

The banks were heavily criticised in the Banking Royal Commission for (among other things) being too ‘slap happy’ in handing out loans to customers. The fallout resulted in profound changes to the lending landscape, culminating in the banks applying more “responsible” lending practices. These practices now involve a loan application process that is more akin to an audit of any borrower before the banks will advance one cent. Applying a much higher level of scrutiny to a borrowers’ financial position and serviceability is what the government now requires and expects of banks in their lending decisions.

That expectation has not stopped small business & family enterprise ombudsman, Kate Carnell, from criticising the banks for putting in place what she terms “quite unrealistic servicing requirements” on small businesses trying to access loans. Well, I am sorry to burst the ombudsman’s bubble – but can you imagine the backlash the banks will face later if they threw away the responsible lending handbook, and dished out funds to borrowers that are not only unable to evidence serviceability, but are potentially in financial difficulty and/or facing insolvency issues. Who will get the blame when the borrower can’t pay it back? The banks of course – it will be their fault because they decided to lend the money in the first place.

With so many businesses temporarily supported by JobKeeper and experiencing a significant decline in revenue, many simply will not stack up from a serviceability perspective in the loan application process (even if they happen to have strong asset backing).

Unfortunately, we can’t “have our cake and eat it too”. The current interpretation of “responsible” lending practices following the Banking Royal Commission means the SME loans guarantee scheme is nothing short of ill-conceived. And the banks are not the one’s at fault.

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