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ECONOMICS REFERENCES COMMITTEE
12/04/2010
Access of small business to finance

CHAIR —Welcome. I invite you to make an opening statement.

Dr Burn —The AI Group appreciates the opportunity to appear before the inquiry into small business finance. AI Group’s membership covers businesses in a broad range of sectors across the economy, including in the manufacturing, construction, logistics, defence, ICT, food and services sectors. Small businesses play a vital role in the general economy and in line with the broader structure of the business community the majority of AI Group’s membership is made up of small businesses.

Our close monitoring of business conditions and ongoing liaison with our members suggests that credit availability remains an important constraint on small businesses. While the availability of creditors improved markedly over the past year, it remains an issue of concern for many businesses.

We have some material we would like to add to the points we presented in our submission. These relate to a survey of our members and an international monetary fund working paper on credit availability in the context of recoveries from financial crises.

We recently surveyed our members asking them about the likely positive and negative influences on the business outlook over the next 12 months. Although we are still finalising the results we can provide the committee with the results of a question relating to credit availability. A total of 25.8 per cent of respondents identified the availability of credit as a negative influence. While this did not vary much by company size, some 27.3 per cent of businesses with fewer than 10 employees identified the availability of credit as a negative influence.

This was the second year we asked our members this question. In 2009 the proportion of businesses identifying the availability of credit as a negative influence on their outlook was 39.6 per cent. For businesses with less than 10 employees the figure was 29.5 per cent. This was well below the average for all businesses in 2009, possibly reflecting the perception on the part of many in this small business group that they would have little demand for credit over 2009. A point of interest in these numbers is that whereas there was a distinct decline between 2009 and 2010 in the proportion of all businesses reporting that the availability of credit was a negative influence, the same cannot be said for businesses with fewer employees where the decline was not all that noticeable.

My colleague will make some comments about the IMF working paper that was released subsequent to our submission.

Mr Chindamo —I would like to bring to the attention of the committee the IMF working paper released on 1 March entitled Credit Conditions and Recoveries from Recessions Associated with Financial Crises. The objective of the IMF study was to assess whether stressed credit conditions affect the pace of recoveries from recessions associated with financial crises. That is, the IMF examined to what extent stressed credit conditions, that is, situations where the cost of credit is unusually high or the availability is unusually restricted, whether they dampen recovery in the aftermath of a financial crisis. According to the IMF, recoveries associated with the financial crisis tend to be more sluggish. That is, output returns to peak five and a half quarters after the recession associated with the financial crisis versus three-quarters for all recessions.

The scope of the study was to use panel data and regression analysis covering 21 industrialised economies, including Australia, spanning the period 1970 to 2004. The key findings of the paper suggest that credit conditions continue to play an important role in constraining recovery from recessions associated with financial crises. In particular, industries that rely on external finance or have fewer assets eligible as loan collateral or that are populated by smaller firms grow relatively slowly during recoveries from these episodes. The paper infers that credit conditions remain stressed well after the trough of the recession. The negative effects are strongest during the first year of the recovery and become insignificant after only three years.

Dr Burn —I would like to reinforce a couple of points in regard to policy making that we make in our submission. We think that there is an important role for governments to play in improving the financial training of owner/managers of smaller businesses and in providing better information regarding finance options, preferably through trusted intermediary organisations. Thank you.

CHAIR —Is it possible for you to provide the secretariat with a copy of the IMF paper, please?

Mr Chindamo —I have a hard copy but I can certainly email a copy as well.

CHAIR —Could you do that, as it is something we might refer to in our report? We have had a little bit of a difference of opinion this morning about whether or not there is a problem in obtaining credit for small business. The Reserve Bank and the Australian Bankers’ Association, defining small businesses as loans under $2 million, thought that there was no change in the rate of providing such loans but other people disagree with that point of view and do feel that there is an issue about credit for small business. I gather that you would agree with the latter viewpoint, that there is a problem there; would you?

Dr Burn —Businesses identify credit availability as an issue of concern to them. Unfortunately we do not have good time series data to be able to compare pre-crisis and now. Had we known we were going to be in a financial crisis we would have been asking this question for several years beforehand. It is certainly an issue for small businesses and it is identified by them as a constraint.

CHAIR —One of the comments which you have just made is the need for more training for people in small business to better educate them in terms of running a business, handling capital management and so on. Many other people have made the same point. I suppose that one could argue that perhaps the banks’, if you like, diffidence about lending to small business in a time of financial crisis may relate to their view of the reliability of the management skills of small business. Would you agree with that?

Dr Burn —I do not know what the views of the banks are about the management skills of small business.

CHAIR —I was just speculating in terms of your comments.

Dr Burn —But we think that there is certainly value in providing that training to small businesses so in that sense we think that the skills could be improved. So that may be an indirect answer to your question.

CHAIR —There is a very high incidence of failure of small business over a five-year period though; isn’t there? That is generally thought to be due to the fact that many people who go into small business are inadequately prepared in terms of managing finance and managing business, which I presume really is the point you are making.

Dr Burn —I think that is correct, yes.

Senator HURLEY —I was particularly interested in point four of your submission, a choice of finance options, and you talked about overdraft facilities. Small businesses often do use the overdraft facilities quite extensively to manage their cash flow, particularly micro businesses. You make the good point that stable relationships are highly valued with banking staff, so I think sometimes people persist with the same bank even though the actual conditions might not be quite right. You make the point that that is not the only method of finance, people might use leasing or hire purchasing options. But in relation to the overdraft, are you getting any feedback about any penalties that might be incurred and whether banks that are quicker to impose penalties are more stringent in the application of fees and penalties for these kinds of accounts?

Dr Burn —We certainly were getting that feedback during the past year but we have not had that sort of feedback over, say, the last six months. But that was certainly a keen topic of conversation among our members in the early part of the last year.

Senator HURLEY —Do you attribute that to the banks being less stringent or to an increase in competition in the lending sector?

Dr Burn —A decrease, sorry?

Senator HURLEY —An increase in competition or a decrease in the willingness of banks to charge fees and penalties.

Dr Burn —I think some would attribute it to a change in behaviour on the part of the banks in that period following the Lehman Brothers collapse.

Senator HURLEY —There was an issue with fees and penalties on overdrafts but that is decreasing as an issue?

Dr Burn —It is certainly decreasing as an issue that is raised by our members with us.

Senator HURLEY —And you feel because the banks are not being quite as difficult about those areas?

Dr Burn —We would draw that conclusion, yes.

Senator HURLEY —In terms of that increasing competition, do you see more lenders coming into the market at the moment or is that still fairly stable?

Mr Chindamo —From what we have seen it is still fairly stable. We have not seen a significant increase in competition, no.

Senator HURLEY —One of the themes of this inquiry has been that issue, and Senator Eggleston did allude to the issue as well of whether there is enough finance around or enough competition for small business, not only in the commercial sector but whether there is enough venture capital, enough capital to support start-ups and that kind of thing. Do you have a view on that?

Dr Burn —Our feeling is that that area of the market is not as liquid as it might be and that, particularly for smaller businesses, a barrier for the new business starting up with an experimental idea is a financing problem because it is like the chicken and the egg, you have to prove yourself before you can attract finance and you have to have the finance to prove yourself. That is an area where we think ideally the market would provide more funds. Mind you, it is a high-risk area.

Senator HURLEY —Do you think that there is any reason for the government to get more involved in that particular area of venture capital start-up finance or do you think that the avenues exist as the economy grows for that to increase naturally?

Dr Burn —We think that there is a case for government involvement in those areas where information failures occur, if you like, so that the market is not working as efficiently as it might. The feedback we received at the time the commercial ready program was axed was that this was having an influence on the interests of venture capitalists in providing funds to emerging businesses, that that source of liquidity into that area of the market was withdrawn and that the flow-on of that was less venture capital was available to small businesses. That was an area where government intervention was facilitating lending in that area, but that was withdrawn a couple of budgets ago.

Senator HURLEY —But you do emphasise the importance of training and education for small business? I raised this issue previously with the National Association of Retail Grocers of Australia that small businesses are high risk in the scheme of things. It is interesting that you see that education is the way to mitigate some of that.

Dr Burn —I think that is a good conclusion to draw from what we say. There is a lot of scope. We have got quite a bit of experience in the current Enterprise Connect program. We are a host organisation in that program. The feedback that we get is that there is a lot of scope for improving small business management of their financial affairs and awareness of their financials. We think that would only help the success rate of those businesses.

Senator HURLEY —I know the Enterprise Connect program in the northern suburbs of Adelaide is very well regarded and, as I understand it, very useful. Do you think that that might be a priority for government in assisting start-up businesses and businesses looking at expansion, that the education area might in fact be the priority?

Dr Burn —It is certainly a priority for businesses. There are so many other areas in this skills space for businesses. I think there is probably a lot of scope for businesses to learn better how to hedge against the exchange rate and what options are available for them. There is a lot of scope for businesses to make inroads into better staff management. We think there is a lot of scope for businesses to improve the way they manage their financials. To rank those sorts of things is very difficult, because there is so much variety across the small business sector about what needs are the highest priority for the different businesses.

Senator HURLEY —Is it your experience that banks perhaps point small business lenders in the direction of that further education or do they provide any education themselves?

Mr Chindamo —Essentially what we have seen is that they provide some limited education but not necessarily a comprehensive program, if you like, of education, so there are gaps that exist there.

Senator HURLEY —You would think it would be a good area to start, would it not, because that is where businesses tend to go first, to see if the finance is available. So it would be a good place to start to give them information about where to seek further assistance.

Mr Chindamo —Potentially, yes.

Dr Burn —There is another point there. There are some inhibitions on organisations being seen to provide financial advice to businesses, or to individuals for that matter, and it may well be that there is a risk of stepping into an area where they are not meant to be operating legally.

Senator HURLEY —This committee has indeed had a look at some of those restrictions. I take that point. But I was thinking more in terms of just pointing people to where they might get that advice rather than providing it as such.

Senator XENOPHON —You referred earlier I think to a lack of information in terms of access to finance for small business. You then said there was information failure—you did not say market failure—but would you agree that the markets have been distorted by virtue of some policies that have been in place in the sense that small businesses are at a relative disadvantage compared to larger businesses?

Dr Burn —I think that the information problems are more significant for smaller businesses because essentially the fixed cost barrier to overcoming those information hurdles impacts more on small businesses than the large businesses, so in that sense there is a market failure that is biased against smaller businesses in that area.

Senator XENOPHON —We have heard evidence today about the extent of the problem from the National Association of Retail Grocers before you. What are the solutions? Do we need to look at the approach in other places such as Canada where they actually guarantee up to around 80 per cent or 85 per cent of small business loans? Do you look at the issue of, for instance, the requirements? The Bankers’ Association said that the APRA requirements for security seem to be much, much higher for small business loans compared to other loans. What are the solutions so that we can deal with this problem?

Dr Burn —The solutions that we put forward are for greater information to businesses. That might be making information about financial options available and in plain language. There is probably a lot of scope for improvement across the board in that regard. For instance, a sign saying, ‘Please turn off your mobile.’

Senator XENOPHON —I do not think that will improve the access to finance for small businesses.

Dr Burn —The other thing that we think would be very useful is the sort of Enterprise Connect program or a similar type of program, active programs that are often delivered by a trusted intermediary that is not necessarily held up in the department of industry.

Senator XENOPHON —Don’t we need to go a bit further than that? I think there was some reference made to commercial ready. We had a Commonwealth Development Bank until 1996. Do you actually need some greater competition injected in the marketplace or some mechanism guaranteeing small business loans so that market asymmetry or that market failure can be redressed?

Dr Burn —My instincts in that area are that there is a warning bell that rings government failure when we talk about governments guaranteeing loans.

Senator XENOPHON —Do you know how it has worked in Canada for instance?

Dr Burn —No, I do not, but I would be very interested to pursue that.

Senator XENOPHON —Perhaps through your related associations or colleagues overseas you could take that on notice as to what their experience has been.

Dr Burn —We will certainly see what we can dig up and provide the committee with that.

Mr Chindamo —We are saying that by providing financial training to firms it will allow smaller businesses to actually be in a better place to make a business case, if you like, to banks so that they can actually tap into the credit markets a lot easier, and external finance a lot easier, irrespective of where we are in the economic cycle. Often smaller firms have not necessarily done all the homework required, have not necessarily put together a business case and banks seem to be more reluctant to therefore lend.

Senator XENOPHON —I agree with you that that is a good thing, but even if you have a well-informed small business that ticks all the boxes and that provides all the information, when you have got things such as the ABA who said in their submission, ‘Capital required by APRA to be held by banks for small business loans is generally three times higher than for home loans and can be seven times higher for some products.’ Isn’t that a problem? Are there some deeper problems both in terms of competition and in terms of the way that the system of loans for small businesses is structured such that they are at a natural disadvantage?

Mr Chindamo —Those prudential requirements are presumably set in a way that obviously reflect the risks associated with lending to smaller versus larger firms, so obviously you would have to look at whether they are set in an optimal way. We do not have any evidence to say that they should necessarily be changed.

Senator XENOPHON —Again, if you would take this on notice, is it possible to look at whether those lending requirements are comparable in other jurisdictions in other places? I am not saying we should go to the US as a benchmark, given their problems.

Dr Burn —We will certainly look at that.

Senator McGAURAN —As you know, every interest rate rise goes to the heart of the ability of small and medium businesses to access funds, which affects their viability. In the last seven months we have had five interest rate rises. We were talking about this with the Reserve Bank earlier this morning. My question would be: in those five interest rate rises have you seen the direct effects that go to the heart of the viability of your membership? What is your view in relation to the haste to ratchet up the interest rates? Should the Reserve Bank stop and wait and see? Are they raising them too quickly?

Dr Burn —We are very cautious about the speed at which the bank is returning the official rates to a neutral level. As far as we have seen with our surveys and the talk within our membership, we are still in recovery mode. We are not recovered. Recovery is quite patchy. Our performance of manufacturing index, our performance of services index, our performance of construction index are not showing that we are in strong rebound territory but we are gradually building up to a respectable level of growth. We keep an eye on those Reserve Bank movements—which we understand in the bigger picture—and we are eyeing the pace of that return to neutral rate as something to keep an eye on and to be concerned about. Certainly in our liaison with members the prospect of further rate rises over this year has emerged as an issue of some concern to them and is anticipated as a significant constraint on business.

Senator McGAURAN —Treasury claim to December 2009 the growth rate was 2.7 per cent and, of that, 2.1 per cent can be attributed to the government’s stimulus package. As I take it, many in your membership, for want of a better word, benefited from the stimulus package. Now we see all the rip-offs and the rorts and that it was absolutely riddled with overpayments and rip-offs. If it were not so serious it would be funny. But we have a finance minister who says that we had to rush it out. Forget about dotting the i’s and crossing the t’s; we just had to get it out there. For example, the Building the Education Revolution and the pink batt schemes would both affect your membership, I am sure. Would you like to make a comment as to what extent it did benefit and what are your membership’s and your industry’s view of the rip-offs, rorts and outright corruption?

Dr Burn —Perhaps I could make some comments at two levels. I will leave the second one to the end, but just in relation to the stimulus generally, we think that the stimulus has been and indeed will continue to be a major factor in the total growth of the economy certainly over the last six months and we think into the rest of this year as well. The withdrawal of the stimulus from the end of the December quarter we think is a factor in the patchy recovery, so that the fact that the stimulus is being wound back is not being compensated for by private sector growth yet, certainly not fully, so that we saw from the end of last year a fading in the demand and in the activity in consumer-related sectors that we surveyed. We think that was pretty closely related to the phase-down of the cash stimulus that went to households, the payments that went in December and the first part of last year. We think that they are no longer having a real effect in the economy.

Many of our construction members say to us that we would not have survived had it not been for the infrastructure elements of the stimulus package. The schools building fund was seen as a saviour by some of the smaller construction companies—

Senator McGAURAN —Have you done an audit of your own membership in regard to that stimulus package rip-off effect? Were you ever aware of what was going on there?

Senator HURLEY —I do not think they would be doing the rip-off then? I do not think they would really be jumping into—

Senator McGAURAN —Is Mr Burn saying he did not know anything that was going on? Is that what you are saying? You may well laugh, but it was happening under your nose if you did not know.

Dr Burn —It was not me who was laughing, but I would strongly object to the fact that it would be our members that were ripping anyone off.

Senator McGAURAN —When you know that?

Senator HURLEY —Where is it then? If you acknowledge that there is a rip-off, as Senator McGauran said or even indeed outright corruption as he said, where is it coming from if it is not people getting the money?

CHAIR —Let us get back to the issues of this inquiry.

Senator McGAURAN —If the stimulus package was to benefit the economy my point is that if some $6 billion to $7 billion has been wasted, has it just benefited your membership and no-one else?

CHAIR —This is access to smart finance for small business.

Dr Burn —As a general point, we detest all forms of waste of government expenditure, wherever they be. We would not confine ourselves to concern around the stimulus payments on that score. We certainly would not condone any inappropriate business behaviour in relation to them or indeed any other government program.

Senator McGAURAN —I am sure you would not condone it, but did you know it was going on? Did you have any idea? There is a lot of chatter going on amongst the builders and you say that builders told you that this saved the day for them, so I think you had your ear to the ground more than you are letting on. Certainly Heather Ridout would have.

Dr Burn —We have not had any information about rip-offs from any of our members.

Senator McGAURAN —It is a pretty wasted stimulus package if some $6 billion of it has basically been part of a rip-off. We are told that the effect at this stage is that some $10 billion of the $16 billion—the rest—

Senator HURLEY —Who told you that? You are stating these things as fact.

Senator McGAURAN —I am asking the questions here. You do not have to ask me the questions.

Senator HURLEY —You are making allegations that I think cannot go unanswered.

Senator McGAURAN —I am just surprised that the industry group knows so little. Let us not kid ourselves.

Senator HURLEY —Maybe you are wrong.

Senator McGAURAN —No, I am right; I am sure of it. I am sure Heather Ridout and her industry group knew more than meets the eye in regard to the rip-offs of the Building the Education Revolution because I can tell you it was very much the talk of the town amongst the builders and the construction workers. It has been going on for a long time.

Dr Burn —As I said before, we did not have any information—we do not have any information about any rip-offs.

Senator WILLIAMS —In relation to competition in banking and finance for small business et cetera, when you see small business paying a rate at one institution and they see a better rate down the road, do you see it as a hindrance to competition if they have to pay an exit fee on a variable loan and an establishment fee down the road? I just think that is a situation where people are not free to walk from one institution to another. I will give you an example. Let us say someone has $1 million worth of real assets, real security in land or bricks and mortar or whatever, and they might owe $200,000 so they have 80 per cent equity. They might be being charged 9½ per cent at one institution. They can see the money down the road for small business is 8½ per cent at another institution. But to get out of that 9½ per cent institution they might have to pay $3,000 exit fee and might have to pay a $2,000 establishment fee down the road. Aren’t those exit and establishment fees surely a hindrance to free competition in the finance market?

Mr Chindamo —We certainly have some anecdotal evidence of transaction costs associated with switching banks or financial institutions and that obviously can make it difficult for some businesses to—

Senator WILLIAMS —Can you expand on that evidence?

Mr Chindamo —Essentially talking to a few members in terms of getting some qualitative information about their experiences in the last six or so months in dealing with banks and so forth, some have indicated that they find it difficult to switch banks or it is just too costly for them to switch banks, so therefore it is a hindrance—

Senator WILLIAMS —Because of those costs?

Mr Chindamo —Costs. It could be relationship factors. They are used to dealing with one bank, one branch and so forth and so on.

Senator WILLIAMS —In my opinion I think exit fees and establishment fees should be banned through legislation so that we can actually bring in proper competition where you can walk out of one institution and walk in next door, like you can with your mechanic who services your car. If you think you are being ripped off you can go to a different mechanic next time. But in finance in many cases you have to pay an exit fee to get out of that mechanic’s shop and then pay an establishment fee to get into the next mechanic’s shop, if I can use that as an analogy. I think that is very wrong when it comes to free enterprise and competition. Would you like to add to that?

Mr Chindamo —The lower the transaction costs in moving between financial institutions the easier it is to shop around.

Senator WILLIAMS —Yes, that is what competition is about. That is what the nation runs on—free enterprise—but not in some sectors of finance, obviously.

Senator BUSHBY —You mentioned in your opening statement that credit availability remains a constraint on the activities of your members. What activity are you seeing being constrained? What are we essentially missing out on through the constraint that is being applied?

Dr Burn —We do not have any information that drills down into that response.

Senator BUSHBY —Presumably some of your members would be looking to expand or to undertake activities that they currently are not able to; is that correct?

Dr Burn —We assumed that they would be across their finance the things that they use money for. Whether that is just the working capital for their existing operations or expansions, we would think that that would apply, the barrier would be evident in both cases.

Senator BUSHBY —You mentioned working capital for existing operations. Are you aware of any members who are having difficulty refinancing or continuing their existing operations because of either lack of availability of finance or finance on reasonable terms?

Mr Chindamo —We have provided in our submission a couple of case studies where we touch upon two examples of how the tight credit conditions have affected a couple of our member firms. The first one relates to a builder firm in the transport industry. Essentially it is affecting their cash flow as well as potentially some of their investment opportunities. The second one relates to manufacturing of stainless steel wine storage tanks, and again there it relates to new purchase orders and investment in capital and equipment.

Senator BUSHBY —Are those two examples that you have included in your submission something that would be extraordinary examples or would they be typical of common challenges faced by your members?

Mr Chindamo —They are representative of the type of activity.

Senator BUSHBY —They are not specific, extraordinary examples that would represent only a very small percentage of the types of challenges that your members would face in trying to operate on a day-to-day basis?

Mr Chindamo —From the feedback we have been getting through our business liaison programs.

Senator BUSHBY —You also mentioned the survey that you have undertaken. You gave us some advanced results of both. We appreciate that. Thank you for that. Obviously the percentage of members that are concerned about that has fallen since last year. That is probably understandable given that things have moved on a little bit in terms of the downturn, but it still at 25.8 per cent is a relatively high proportion of your members that are concerned about finance as a major issue.

Dr Burn —It appears so to us as well, although as I said also we do not really have the time series data that allows us to compare with previous periods, so we cannot really say—

Senator BUSHBY —It would have been very nice to be able to see what they thought in 2007.

Dr Burn —Yes, exactly.

Senator BUSHBY —But the interesting factor as you noted is that the fall for small businesses has been negligible in terms of statistic variance; it is a couple of per cent.

Dr Burn —That is right. It is certainly nowhere as decisive as the general fall.

Senator BUSHBY —The larger end of your membership’s concerns are being satiated to a greater extent than small business?

Dr Burn —The interesting thing about that survey is that we are asking them in both cases about their expectations over the coming 12 months. This time last year, or March when we did the survey, people were probably very gloomy about the outlook.

Senator BUSHBY —On balance over a quarter of your membership as a whole and a slightly higher percentage of small business are concerned about their access to finance. We have had evidence today from the ABA and also the Reserve Bank to some extent which indicates that on the evidence available to them access to finance is not an issue, so it is interesting that your member survey results return something which shows that a significant proportion of your membership considers that it is. What do you think the factors are that have led to finance being an issue with small business. What are the problems? Is it decisions made by government; decisions made by banks or is it the general economic climate? What is actually causing the problems for your membership?

Dr Burn —The evidence that we have is that probably for small businesses a return to the borrowing market is a factor in the slightly higher number for small businesses reporting a concern. We think that this time last year small businesses were probably saying, ‘We do not want any money; we are not confident enough to go and borrow anyway.’ But now they are more likely to be in the market so that they are more likely to be rejected, if you like, because they are going along to the bank. But we also think that the banks have tightened up their lending criteria and so we think that is having an impact as well.

Senator BUSHBY —So far as you are aware is that having an impact on any of your members that have viable businesses but who fear that they may not be able to meet the lending criteria regardless?

Dr Burn —That is the feeling we are getting, that they are more likely to come up against those lending criteria than they were in the past.

Senator BUSHBY —Despite the fact that their businesses are running soundly and they are quite solvent and anticipate being able to meet any loan repayments that they might get into?

Dr Burn —We would like to think that all our members were in that situation but we cannot vouch for that.

Senator BUSHBY —That is right. But the question I guess is are there small businesses out there that are quite capable of meeting loan repayments and who maybe even have a demonstrated history of being able to meet loan repayments but who are now finding themselves unable to secure finance either to continue or to expand on the basis of decisions that banks have made to raise the bar in terms of lending criteria?

Dr Burn —We fear that that is the case. We do not have any direct evidence about that.

Senator BUSHBY —What impact would that have if it is the case on the general economic activities of your members?

Dr Burn —The evidence we have about the activity of our members is that the recovery is quite patchy. Whether that is due to finance or to the pace at which confidence is being restored to the economy we are not yet able to discern.

Senator BUSHBY —The IMF information that Mr Chindamo outlined indicates that financial credit means that it is probably a slower recovery for a lot of small business that are affected by that, so that was very interesting. In terms of the competition, in the course of the economic downturn we saw almost all lending from non-ADIs cease and basically consolidation of lending activities to small business through the ADIs. Has that had an impact on your members?

Mr Chindamo —We do not have hard evidence on that.

Senator BUSHBY —You have not in your surveys asked questions about the source of funding that they seek?

Mr Chindamo —No, we have not.

Senator BUSHBY —You mentioned that there is an important role to play for financial training and better information. Is that a role that an organisation like yourself could deliver to your members at least?

Dr Burn —We have a role for example in the Enterprise Connect program where we sort of intermediate between the government who provides the program and our members. The advantage that we have in that is that businesses are likely to trust us more than they would trust, say, the department of industry, God bless its soul. In that context we think that organisations like ours have an advantage in the provision of that sort of training.

Senator BUSHBY —Presumably you do not have the resources to supply that kind of information without some form of financial input by government or otherwise?

Dr Burn —We do provide some information but—

Senator BUSHBY —But to the level that you think these require?

Dr Burn —That is right.

Senator PRATT —You have argued that banks have tightened lending criteria and that they are more likely to come up against lending criteria even though they are viable businesses. You have said you have not got any hard evidence to that effect but you think that that is the case. How would we go about substantiating that argument?

Dr Burn —Testing the hypothesis I think would involve focus group encounters with small businesses. That might be one methodology. Surveys of the kind that we conduct are not really great instruments for digging down deeper below the surface of things.

Senator PRATT —On the question of competition you have talked about the need for greater competition and that basically one of the things that is coming out with this inquiry is the clear link between greater levels of competition and more generous, or more lax, lending criteria. That is a clear argument that has been put forward. Do you therefore expect to have to wait for economic conditions to improve before there is an increase in competition and therefore in turn before the finance situation improves?

Mr Chindamo —Possibly so, in the sense that potentially lenders are still waiting to see how economic conditions improve before offering different and additional products. There is potentially some of that.

Senator PRATT —How would you perceive lending criteria being related to actual risk as opposed to lending criteria becoming more generous in response to, I suppose, the players that are trying to gobble up market share and the different ways in which those two things affect the ability of business to access finance?

Mr Chindamo —I suppose I mean lending institutions will make those decisions based on all of those factors in the sense of what the actual viable business proposition is as well as the state of the economy at the time and obviously any prudential requirements as well. What we have seen is a kind of rational decision to tighten lending conditions as a response to the GFC. Whether that then becomes the norm remains to be seen in terms of lending practices.

Senator McGAURAN —In order to follow up on what we were talking about before and maybe to pull it together, Senator Hurley, to make it more relevant because it is relevant. It is all about interest rates and the cost on small business. You agreed that you are concerned about the latest ratchetting up of interest rates and for the best advantage of your members you wish that the Reserve Bank would take a wait-and-see attitude. So do I. You also then, on the other hand—wanting it both ways, I might add—wanted the stimulus to save your membership. Putting all the rorts aside, that you did not know anything about and to date you say that it has really helped your members, as from today—you cannot have it both ways—if the government continue to spend at the rate they are they are going to affect interest rates. Which one do you want? Do you want the government to pull back on stimulus spending? If so, interest rates will come down—or there will be a downward pressure. What do you want?

Dr Burn —We support the current program of the withdrawal of stimulus because we very much hope that the private sector will emerge to fill that void that emerged with the global financial crisis and that as this year unfolds private sector activity will increasingly take the place of that government spending as it is withdrawn according to the current timetable of its withdrawal.

CHAIR —I thank the Australian Industry Group for appearing.

Proceedings suspended from 12.44 pm to 1.34 pm