Banks compete for SME business in $40bn Covid loan scheme

The banks are onto a winner with the $40bn Business Recovery Loan Scheme and it could also be a smart move for an SME that can repackage or increase its debt.

The banks are essentially getting their money to fund them from the Reserve Bank, at an interest cost of just 0.1 per cent and the taxpayer will pick up the tab for 80 per cent of any loan loss.

THREE of the four big banks have now detailed what interest rates they will charge SME borrowers under the government’s $40bn Business Recovery Loan Scheme.

The ANZ is the one keeping mum on its rates and so quite how much customer gouging — or, more politely, profit extracting — it will aim for, courtesy of the taxpayer.

A week ago, ANZ said it was “working through the finer details” of the scheme. Now it’s saying “talk to us”.

So, I presume, it’s completed the “working through”; but unlike the other three, it just doesn’t want to spell out what it will Charge — with a capital C — borrowers.

On the surface the CBA is most customer friendly. Its rates are 2.6 per cent for a secured loan and 3.25 per cent for an unsecured loan.

That compares pretty well against the 2 per cent or slightly less the banks are charging on owner-occupied housing loans, or indeed investor housing loans in the 2.3-2.5 per cent range.

But those CBA rates are from 2.6/3.25 per cent — the actual rates for many borrowers will be higher, maybe even significantly higher.

On the one hand these loans are somewhat high risk.

They cannot be secured against any form of residential property — even a wholly owned investment property.

An SME can also only get one of these loans — under Version 3.0 of the government’s scheme — if it was getting JobKeeper in the March quarter.

You had to be really suffering — or good at rorting — to still be getting JobKeeper to pay your worker wages and salaries through March.

Or alternatively, be operating in the international tourism — incoming or outgoing — space.

That said, there are two big things going for them; for the banks, that is.

The banks are essentially getting their money to fund them from the Reserve Bank, at an interest cost of just 0.1 per cent and the taxpayer will pick up the tab for 80 per cent of any loan loss.

To be able to borrow money all but free at 0.1 per cent and lend it, fully secured against industrial or commercial property, at 2.6 per cent and higher and be at risk of only losing 20 per cent of the money, absolute worst case is, let me say, “attractive”.

That does though make “only” 3.25 per cent on an unsecured loan look even generous; except the banks will only make small loans (maybe up to $100k) unsecured, as against the “up to $5m” on secured loans.

This shows that the scheme is far more beneficial to an “M” among SMEs than an “S”, especially a very small S which got really battered by those mandatory government lockdowns and lacks any non-residential property for security.

NAB’s rates in contrast are 2.8 per cent on secured loans — not “from”, but that one rate — and 3.95 per cent, similarly, on unsecured (maximum of $250k).

Westpac has a range — from 2.58 to 4.28 per cent — depending on security.

So, the same old advice to SMEs applies to that — usually gratuitously — proffered by politicians with home loans: shop around.

You do not have to be an existing customer with the bank to get one of these loans.

You just have to have an annual turnover of less than $250m (last year, this year or next) and had JobKeeper in the March quarter.

Versions 1.0 and 2.0 of the scheme were not attractive — to the banks — because banks were at risk of 50 per cent of any loan losses.

They only lent out $3bn of the $40bn available.

I’d expect much more to go now. It’s — taxpayer — money for jam.

That’s certainly true for the banks: margins of 260 points-plus virtually riskless.

It can be also for a smart SME that can repackage or increase its debt.

Originally published as Banks compete for SME business in $40bn Covid loan scheme