Westpac head Brian Hartzer warns of credit squeeze in Hayne proposal

Westpac chief executive Brian Hartzer has urged an examination of industry data on business loans of less than $5 million.

Brian Hartzer Westpac CEO appearing at a House of Representatives Standing committee on Economics hearing at Parliament House in Canberra. Picture Kym Smith

Westpac chief executive Brian Hartzer has urged the Council of Financial Regulators to examine industry data on business loans of less than $5 million, saying the adoption of one of Kenneth Hayne’s recommend­ations to ­expand protections for small business would result in higher interest rates and a credit squeeze.

The Australian Banking Asso­c­iation has baulked at taking on a royal commission recommend­ation to broaden the current defin­ition of a small business to a company with fewer than 100 employees­ and total credit facilities of $3m to one in which the definition covers any small business loans of less than $5m.

Changing the definition would extend protections afforded to family enterprises under the sector­’s Banking Code of Conduct by up to 20,000 businesses, which allows for simplified ­contracts, fewer burdensome loan condit­ions and the exemption from enforcem­ent action where a borrower has met loan ­repayments.

Because banks would be barred from easily tipping small businesses into receivership, it is expected that the sector would charge higher rates of interest for borrowers to offset the extra risk the lenders take on.

Mr Hartzer said the adoption of Mr Hayne’s proposal — which was in line with recommen­dations by legal expert Phil Khoury, who reviewed the ABA code — could have a “very severe” impact on banks and the small business community.

“I think it’s important to go back to the fact that we want to lend to small businesses. That’s how we make money, that’s how we grow,” Mr Hartzer told MPs at the House of Representatives economics committee hearing in Canberra yesterday.

Setting the threshold at $5m a loan “would expose the banking industry to extra risks that it’s not comfortable with”, he said.

“The likely response would be a tightening up of credit for that cohort and a likely increase in the cost of credit.

“We think it’s going to make things significantly worse for peopl­e who want to access credit.’’

Despite support from Aust­ralian Small Business Om­buds­­man Kate Carnell for the expand­ed definition of small business, Mr Hartzer said the banking industry had conducted analysis showing $3m was the “approp­riate threshold” for the code.

“Why don’t we start at $3m, which is a big improvement on where it’s been, and then come back in three years and see who’s been excluded,” he said.

Mr Hartzer said the Council of Financial Regulators, which include­s the Reserve Bank, Treasury­, Australian Securities & Invest­ments Commission and Australian Prudential Regulation Auth­ority, should review the data collected by the banking sector before making a decision based on “the vibe of the thing”.

Josh Frydenberg has repeatedly urged the banking sector to keep credit flowing for small businesses amid an economy-wide slowing in lending. Westpac is now lending to small businesses at 1/10th of the rate it is doling out credit to home buyers, which Mr Hartzer said was caused by a lack of demand from enterprise. “The desire to lend to small businesses is absolutely there,” he said.