This was published 5 years ago
No extension of lending protections for small business
By Cara Waters
The final report of the banking royal commission released on Monday has left lending to small business mainly unchanged.
There was no extension of consumer credit laws to SMEs however the report did recommend expanding the definition of small business.
Carolyn Flanagan giving evidence at the banking royal commission. Mrs Flanagan lost her home after going guarantor on her daughter's small business.
“With some exceptions, I generally do not favour altering the rules that govern lending to small and medium enterprises,” Commissioner Kenneth Hayne said in the report.
Commissioner Hayne recommended the responsible lending provisions of the National Consumer Credit Protection Act do not apply to lending for business purposes
“The policy choices that have been made to limit the application of this regime reflect recognition of the need to ensure that small businesses have access to reasonably affordable and available credit,” he said.
Commissioner Hayne was guided by concerns that any further regulation would tighten up lending for small business with an RBA report released in September finding one fifth of small businesses are finding it challenging to access finance.
He did recommend expanding the “too complicated and too confined” definition of small business in the 2019 Banking Code to encompass businesses with turnover of up to $5 million and up to 100 full time employees.
Small businesses are currently defined in a three part test which includes businesses with turnover of up to $2 million and up to 20 employees.
One of the issues the banking royal commission grappled with was how banks practically discharge their obligations under the code when lending to small business.
The royal commission maintained the existing standard used by banks of the inquiries that a “diligent and prudent banker” should make when deciding whether to offer or extend a line of credit.
Loan guarantees were another issue considered by the banking royal commission and highlighted by the evidence to the commission of disability pensioner Carolyn Flanagan against whom Westpac tried to enforce a guarantee by possessing her home.
However the banking royal commission did not recommend altering or adding to the existing law in relation to guarantees, whether in support of lending to SMEs or more generally and it did not recommend imposing any obligation on a lender to renew a loan or to renew it on particular terms.
While the royal commission cannot award compensation, there is some potential relief for small businesses which have been victims of bank misconduct with the announcement of a last resort compensation scheme.
The government has accepted all of the banking royal commission’s recommendations in part or in whole.