Bank Funding costs – Business Lending Squeeze continues
Latest bank lending data released by APRA and the Reserve Bank of Australia confirm the
continuing lending squeeze on enterprise, with growth weak and prices increasing. Why is this
happening, what lies ahead, and what should businesses do to improve their competitiveness in
this new financial year? Since 2008 the total stock of outstanding credit has grown, albeit at a
slowing pace. However further investigation of the sectoral data shows that the total credit stock
made available to the business sector remained flat in that period as weak new business loan gains
were wiped out by loan repayments. This performance is in stark contrast to the rising credit stock of
the housing and personal sector which has risen from $800bn to over $1260bn.
Turning to the affordability of financial services, data from the Global Competitiveness Report for
2012-2013 places Australia in a lowly 36th place globally. This was one of the worst performing areas
for the Australian sub-indices which make up the total index. The data confirms what most
Australian SME owners know already – that new loan growth is being constrained and is coming at a
high price compared to other countries. The chart below uses RBA data to show the rising interest
rate differential for various loan types compared to the RBA base rate. The golden era from 1999 to
2007 of low interest rate differentials for loans <$ 2mn is well and truly over – back to 1994!
Stronger competition for housing loans is being subsidised by higher loan rates to businesses,
particularly smaller SME’s. Why is this happening? First banks are under increasing pressure to
increase profits and dividends to shareholders. In times of slowing overall credit growth banks revert
to their comfort blanket – lending to households. This is where most of the banking skills base is and
where it is easier to turnaround profit. Second household’s competitive behaviour and ability to
switch lenders and products has continued to put pressure on the ability of banks to increase the
lending rate differential for this sector.
All this comes at a price though – lending to non-productive sectors of the economy will not boost
productivity or drive future economic potential. In fact it is more likely to do the complete opposite increase bubble risks in the economy and take away consumption from other areas of the domestic
economy. Businesses need to do what households have already done and start seeking other
lending options to drive lending competition across the sector. What lies ahead?
With further squeezes in lending growth ahead as the economy faces increasing headwinds, and the
banking sector faces new regulatory challenges, this crowding out of business sector lending by
household lending is expected to continue. Headwinds with limiting policy options available include:

Slowing growth and rising risks across China and other global export markets

The end of the investment phase of the mining boom

Continued weak business and consumer confidence

High household debt balance sheets weighing on consumption and house prices

Lower government consumption

Rising unemployment despite interest rates heading toward 2%

New Basel III bank lending rules
With a new tax year, a new PM and a new Government possible over the coming months, now is the
time to improve the competitiveness of your own business as the economy reaches a turning point.
As well as looking at wage, rent, energy, insurance and other business costs don’t forget to re-assess
your lending facilities, an often overlooked part of improving your firm’s competitiveness. Maybe
your business loan can be as competitive as your housing loan?
Andrew Stockman (BSc, M.Econ)
Economist