Businesses fear banking royal commission wash-up

The worst fears of small and medium-sized businesses about the repercussions of the bank inquiry seem likely to be realised.

For bank shareholders too, Scott Morrison’s regulatory moves are not good news. Pic: AAP

As Treasurer Scott Morrison announced that “corporate cops” would patrol inside the big banks to open their day-to-day operations to the regulator, business owners around the country shivered.

And, as I discuss below, that small and medium business shiver will be multiplied many times in shareholder ranks and it reinforces my commentary last month that the golden age of banking is ending.

Even before the Morrison announcement, small and medium-sized business owners had suddenly become fearful of the repercussions from the royal commission into banking. Now their worst fears seem likely to be realised.

No researcher knows the small business community better than Ross Cameron of Cameron Research and last week he asked business owners about the financial services royal commission.

What he discovered was that the consequences for small and medium-sized enterprises are set be alarming. One owner summed up the view of most other business owners this way:

“Banks will overreact because they’ll be inundated with regulation and government interference. So it will be like pouring cement on the lending systems — there’ll be far less support of entrepreneurs … bank lending will have to fall given the increased regulation it will be subjected to …. banks will want to maintain the same profits so they’ll increase fees or increase interest rates.”

Small and medium-sized business is not only our largest employer but also the driver of large parts of the Australian economy.

The wheels have not fallen off but already there are danger signs as car sales fall, dwelling prices decline and the relentless attack by the Australian Taxation Office on entrepreneurial business owners continues.

While the Treasurer has been stunned by the royal commission revelations, Cameron Research found little surprise among business owners. The themes emerging simply confirmed what many SMEs have been saying for years.

As one owner told Ross Cameron: “It’s raising issues that we knew about — the banks are overcharging and making ridiculous profits and they’re covering up everything they do wrong. That’s at the heart of it — but all that is emerging is what we already knew. There’s no surprises and if people are surprised then they’re naive”.

Cameron says business owners are pragmatists. They believe the banks focus unduly on shareholder returns … that there is an excessive sales culture … that they aren’t particularly customer-centric … and that they charge too much. But they accept this and move on — at least they feel they know what to expect. The bottom line is that they need bank support.

And so business owners believe that while there will be changes as a result of the royal commission most of the changes will be negative.

They believe credit will become more difficult to source, with increased paperwork required and a heightened aversion from banks to lend to unusual businesses. They think lending decisions will take longer.

Business owners are still critical of the banks for a perceived excessive focus on hard-assets as security — but they think that if anything, this is actually going to get worse because of the royal commission.

Some business owners believe the royal commission revelations, plus recent regulator-driven measures, are already tightening lending.

One business owner says: “I needed a credit increase of $20,000 when I was setting up the new office. It was just a temporary increase that I was asking for during the initial set up and the amount of paperwork involved was insane. It was so cumbersome and none of it can be done online.”

An aeronautic engineer reports a similar experience: “In terms of getting funding it just feels like it is taking so much longer — like if it took two weeks before it’s taking six weeks now — because they want everything to be squeaky clean.”

Cameron Research is at the cutting edge and it will be months before what his surveys are discovering is displayed in the economic figures.

But the fall in car sales is an early sign that the downturn may come faster especially given the Australian Taxation Office small business abuses documented by the small business ombudsman, Kate Carnell.

For bank shareholders the Morrison statement is not good news

Many banks are deeply fearful of the extra regulation. They say that given that growth in home lending is set to fall, lending to small business must now be the banking growth area but it will be swamped by red tape. .

There will be many new entrants into the field who don’t have the same restrictions as banks and will look to take the banks’ lunch. Some banks are investing in new technology to better evaluate existing customers so that they can increase lending to businesses that have a good track record, despite the new red tape. This now becomes an urgent priority. All banks are fearful that the new regulations will be stultifying at the wrong time.

Many bank business loans are secured on real estate, which has fallen in value, which will make business owners more nervous about seeking more credit even without the lending restrictions.