ABA walking both sides of the street on ASBFEO loan contract reform

AUSTRALIAN Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell has refuted claims made by the Australian Bankers’ Association’s (ABA) chief executive Steven Münchenberg that eliminating all non-monetary covenants from small business loans under $5 million would raise the risk of lending to small business, saying the ABA – and the banks – are contradicting themselves in arguing against the reform.

“On the one hand the banks say they rarely use non-financial default clauses, but on the other, they say to remove them would increase risk for the banks.  If you don’t use them, how on earth could it possibly increase the banks’ risk to get rid of the clauses?” Ms Carnell said.

“It is disingenuous to say that removing these clauses would drive up the cost of borrowing for small businesses, given the banks already take into account a higher level of risk in their small business loan costs.

“You can’t have it both ways; you can’t have a loan agreement that moves all the risk to the borrower, while also imposing a higher interest rate on small business customers.

“Over the last few days we’ve seen banks commit to implementing this measure in varying degrees, yet here we have the ABA claiming the sky will fall in if our recommendation is adopted,” she said.

During today’s House Economics Committee hearing, Westpac executives said they’re committed to removing non-monetary covenants from all small business loans under $1 million (secured against property), with the view to extending this to most loans under $3 million (total loan facility).

ANZ include – but don’t apply – non-financial default clauses in loans under $1 million and now say they’re going to consider the future use – but not removal – of such terms in agreements for loans of up to $3 million (total loan facility); CBA has committed to removing non-monetary default terms from agreements for loans up to $1 million, and may raise this to $3 million (total loan facility) with carve-outs; while NAB say they’re opposed to the removal of non-monetary covenants.

“Aside from NAB, these are all steps in the right direction, and we’re listening to what the banks are saying on carve-outs, but fundamentally non-financial default clauses must be removed from small business contracts under $5 million if we’re to ensure all small businesses are safeguarded against what can be the devastating impacts of these clauses,” Ms Carnell said.

www.asbfeo.gov.au

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