The bank deals on COVID SME loans

Two of Australia’s big banks have finally rolled out the deals they will offer small businesses under the government’s $40bn subsidised Covid19-recovery loan scheme.

The $40bn subsidised loan scheme to help small businesses brutalised by the mandatory government lockdowns.

It’s taken nearly a month, but two of the four big banks have finally rolled out what loan deals they will do for SMEs under Version 3.0 of the government’s $40bn subsidised loan scheme to help small businesses brutalised by the mandatory government lockdowns.

Broadly, I’d give the two – CBA and Westpac - a very small-t tick; in the sense that they have resisted the temptation to really screw SMEs. Indeed, they’ve been almost reasonable.

I can’t really comment on the third, NAB, as it won’t disclose what interest rates it intends to charge borrowers. “Talk to one of our business bankers”, is all it says.

As for the fourth, the ANZ, well, all it’s said is: “We are currently working through the finer details”.

I’ll interpret that for you as saying, “we haven’t finally decided what we can get away with, courtesy of the taxpayer”.

There are three things to bear in mind upfront.

The most important is that the Federal Government will now pick up the tab for 80 per cent of a loan loss.

So if a bank lends an SME $1m the most it can lose is $200k whether the loan is secured or totally unsecured. If it lends the maximum $5m the most it can lose is $1m.

Versions 1.0 and 2.0 of the scheme had the Feds picking up only 50 per cent of losses. The banks did not find that attractive; so all through 2020 they lent out all of $3bn of the $40bn supposedly available.

Secondly, the loan can be unsecured or secured, but if secured it cannot be against residential property (even a debt-free investment property) – usually, the only real asset especially the ‘S’ in SMEs have to secure borrowings.

Third, the government had set an interest rate ceiling of 7.5 per cent.

As I explained, that opened the door for the banks to go to town on the best money-making taxpayer-funded rort in history, given that the Reserve Bank is lending money to the banks at just 0.1 per cent interest.

Borrow money at 0.1 percent – to stress, that’s not even a full single 1 per cent, but 0.1 per cent; all but zero – and lend it at 7.5 per cent and with the government picking up 80 per cent of any loan loss!

Well, Westpac will lend an SME the money at 2.58 per cent for three and five year terms; and at 3.48 for a ten year term.

But only if it is fully secured (on ‘something’ other than residential property); and the rate is variable. That’s to say, like a variable housing loan, it can go up or down. Trust me; it won’t be going down.

CBA will lend unsecured but at a higher rate; and again all its lending rates are variable, just like the basic home loan.

CBA’s core rate for a secured loan is a similar 2.6 per cent (3.25 per cent for unsecured), but in both cases it says it will lend at rates “from” that level.

Compare these rates with the 2 per cent and indeed sub-2 per cent that banks will lend for home loans – with no guarantee from the Feds. They’ll even lend at between 2 and 2.5 per cent for investment properties.

Apart from anything else it does show you that residential property was, is, and will always be king – used as security, for well over 80 per cent of all banking lending in Australia.

As I say, the banks have resisted the temptation to (really?) gouge – you might have expected them to charge 4 per cent plus especially on unsecured loans.

But even 2.6 per cent plus on a fully-secured loan, when the government will pick up the tab for 80 per cent of any loss, is on the highish side.

At least CBA is prepared to make unsecured loans, albeit with interest rates starting FROM 3.25 per cent, whatever that will prove to mean in practise.

These loans are only available to those SMEs still getting JobKeeper in the March quarter - that’s to say, either the most battered or those smartest in exploiting the JobKeeper handout.

Originally published as The bank deals on COVID SME loans