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

CHAIR —We welcome the New South Wales Business Chamber, which has put in a submission numbered 33. Would you like to make an opening statement?

Mr Cartwright —Just to put some perspective around the New South Wales Business Chamber, we are the largest business organisation in New South Wales. We have about 120 affiliated local chambers of commerce. Local chambers in New South Wales would have about 14,000 small business members altogether. But we also represent the interests of regional chambers such as the Sydney Business Chamber, Hunter Business Chamber, Illawarra Business Chamber and the Canberra Business Council.

Directly and indirectly this chamber speaks on behalf of about 30,000 employing businesses across New South Wales. The New South Wales Business Chamber is also part of the Australian Chamber of Commerce and Industry, which has made a separate submission to this inquiry, and nationally the chamber movement represents more than 350,000 Australian businesses and is the voice of business at a local, state and federal level because of the various tiers of the chamber movement.

Firstly, I would like to begin by welcoming the decision of the Senate to hold an inquiry into small business access to finance. It is an important inquiry for the Senate to be conducting and we look forward to seeing the recommendations and the actions that arise from the inquiry itself.

Small business is the lifeblood of Australian business. There are over 750,000 small businesses that employ staff across this country, and small business employs over 5.1 million Australians. That represents more than half of all private sector employment. In the financial year 2007-08, this particular sector of the business community contributed over $300 billion to the national economy.

While the focus of media and other commentators is usually on larger companies, those that make up the ASX 200, it can be easily forgotten that the largest sector and the largest employer in Australia is in fact small business. Also, it should be remembered that you cannot become a big business without first starting life as a small business. The primary difference between large companies and small businesses is that small companies are owned and operated by their owner, and management is not outsourced. It is something that is done by the owner themselves. Small business owners by their nature are passionate and heavily invested in their business, both financially and emotionally. They do not leave work at one minute past 5 and forget about it till they turn up the next day. In fact, they actually work harder and longer each week than most people, including the extremely well paid executives from the banking industry. As I said before, they are emotionally invested in their business and it is their hope, their dream and in most cases it is also their only retirement fund.

How do I know all of this? As I mentioned a moment ago before the inquiry started, I used to be a small business owner. Prior to joining the New South Wales Business Chamber nine months ago, I started and built two successful businesses, one of which is now a public company listed on the Australian Stock Exchange and employing over 1,200 staff across Australia, but it started life as a small business.

The reason I mention this is really to emphasise the point that small business owners are not by their nature fly-by-nighters. They are people who want to build and create. They are in our workforce of 11 million people 750,000 people who get up every day absolutely driven by an intention to build and expand our economy.

The ABA and others often suggest that small business owners are a risk to banks. In fact, they emphasise the fact that small business owners are a big risk to banks. My question to you is: who is actually taking the bigger risk? The person who is working 12 hours a day and has their house mortgaged in order to fund the operations of their business, or the banks who seek and hold high levels of security for most, if not all, of the small business finance they provide. I start from the premise that as a group small business owners are a good investment and are some of the best customers that our banks actually have.

Let me make it clear from the beginning that, in entering into this debate about access to finance, we do not in any way argue against the right of banks to make their own decisions about creditworthiness. Indeed, there is a substantial amount of evidence coming out of the US to suggest that a prescriptive approach to finance that opens the floodgates can and does do enormous damage.

Today we do not seek to bash banks. We do not seek to argue for more regulation. We do not seek to disrupt or weaken the stable foundations of our banking system. We are arguing for greater competition in the marketplace and more innovative thinking from government about how we can open up the opportunities for finance to the small business sector.

I accept that in the banking sector the normal rules of completion do not apply and they should not apply. That might seem a strange statement from somebody who actually is committed to free markets, but I would like to explain what I mean. The normal forces of competition inevitably see businesses rise and fall depending on the product, business model and strategy of that particular business. In any given day businesses merge, incrementally expand, downsize and even possibly close. Yet to allow those free market forces to apply unabated to financial markets and the banking sector is to expose the broader economy to a greater risk than we would be able to withstand.

Whilst competition thrives through the changing fortunes of businesses and the changing needs of consumers, such forces need to be tempered in the banking sector. However, the challenge is to have sufficient competitive pressure to ensure that the sector is operating optimally, efficiently and in the best interests of the broader economy.

Our belief is that we do need more competition within the banking sector, and such competition will benefit the broader Australian economy. The fact is that the Australian banks through a confluence of circumstances have by and large fared relatively well throughout the global financial crisis. Prior to the GFC the major banks generated approximately 60 per cent of all new owner occupied loan approvals in Australia. By the end of 2009 their share of the new mortgage market has increased to around 80 per cent.

The major banks have also increased their net interest income by more than 20 per cent over the last 12 months, reflecting both the increasing market share that they are enjoying and the increasing margins between the cost of borrowing and the borrowing rates to customers.

Our banks have performed better than overseas banks, and to quote the RBA, they have had only a modest decline in profitability. Indeed, bank share prices have almost fully recovered from the GFC, a remarkable outcome in the circumstances.

Of course, if one reads the words of Australian bank CEOs in the press you would get the feeling that it is a big, bad world out there for banks in Australia. The reality is it is not. The sun is shining on our banks and it is something that we need to remember.

Our premise is essentially that Australia needs more competition in the banking sector. The sun might be shining on our bankers, but lethargy is never the foundation for growth or innovation.

Firstly, we simply restate our view that our marketplace must stay open to new entrants. Secondly, we must show more scepticism about claims that the merger of second and third tier financial institutions will not lessen competition. It does, it has and it will. Thirdly, the government must act as it did in the household mortgage sector to reduce the barriers to switching providers. We believe the Productivity Commission should do a full review of the costs and constrains faced by small business when they engage with banks to secure finance. Fourthly, the government, the opposition and the media have all been very effective in holding the banks to account in relation to home loan mortgage rates.

The strategy of naming and shaming banks has ensured that householders receive in full the RBA interest rate cuts, and when the cycle turned that those increases have largely been held to official levels. Yet this has not occurred in the small business sector. Indeed, there is an argument that following an increase in the banks’ own costs of finance we have seen some cross-subsidisation between small businesses and the home mortgage market.

Since mid-2008 we have seen the spread between small business loans and the cash rate increase from around 200 basis points in 2008 to over 400 basis points in 2010. To put this into some perspective, if that skimming of the 200 basis points occurred in the residential mortgage market, it would be akin to the banks adding an additional 40 basis points for each of the five interest rate increases that we have had over the past seven months. I suspect that, if this had actually happened, there would have been riots in the streets. The fact that this has not happened in relation to the gouging of small businesses is in part because no-one within government feels any compulsion to name and shame the banks on this particular issue. This is despite the fact that small business directly employs over five million Australians.

Fifthly, we do believe that there is scope for the Australian government to take on a role as guarantor of the small business finance market as a temporary means by which we can free up access to small business finance. This is not a revolutionary concept. Such government guarantee schemes already operate in Canada, the UK and the US. Under our proposal such a scheme would be self-funding, ensuring absolutely no cost to taxpayers. The guarantee would be priced. It would share the risk between government and the banks and it would ensure that Australian banks could once again feel relatively confident about lending to the small business sector.

Our members are very clear when they say access to finance is a major concern. I would like to just read very briefly to you a letter from one of my members who operates in Kings Langley in Sydney’s greater west who recently wrote to me and stated:

I own and run a company that designs specialised transport warehousing, distribution and management systems for distributors of goods and services throughout Australia. My business is profitable and has been growing strongly for the last 14 years. Over those years I have borrowed successfully from financial lenders to purchase additional properties to expand my business. In more recent times I have been frustrated by the lack of support and fairness from financial lenders when I have required additional financial assistance. For example, a few years ago my business experienced a temporary slowdown as a result of several of my then employees starting up a rival company and poaching customers and staff from my company. Twelve months after this occurred I attempted to get a $200,000 overdraft loan from my bank, which was refused. As our cash flow was extremely stressed, I was forced to seek alternative finance. I remortgaged both of our industrial properties with two financial institutions, who would only provide an interest only loan, and charged up to five per cent more interest than the bank, and forced me to renew the loan annually. The high annual refinancing costs and the higher interest rates placed even more stress on my business and on me on a continual basis. Since the advent of the GFC the banks have continued to put the screws on my business by withdrawing several flexible financial options that my business used to ensure suppliers and staff were paid promptly. Without any notice, my bank withdrew a flexible overdraft that provided me with additional time to pay the monthly balance and the ability to write cheques against deposited funds. In response to this change of policy I was forced to sell my home and downsize to a home unit and put the balance into my business. Yet again I received no support from my financial institution. I have also had two major customers go into liquidation, owing my business $350,000. To cover this loss I increased the borrowing against one of my industrial properties from an alternative financial lender. This cost my business $60,000 in fees to end the first loan and to establish the second. One third of the increase in borrowing was actually these fees. I love running my business. I am proud of the fact that I have got great relationships with my customers, suppliers and the people we employ, but sometimes I wonder if it is all too much. I wonder if the banks and the politicians know how challenging and stressful it really is, how worrying it is to fear someone else will pull the rug out from under you and from under a lifetime’s worth of work. I am not suggesting the banks throw their money around stupidly. I am simply saying that they ought to look up from their balance sheets and treat their smaller and long-term customers more fairly.

I think Wayne’s words summarise why this issue is so important and why it is so personal for small business. Livelihoods across this country depend on resolving this issue. I sincerely thank you for holding the hearing and for your patience today. I understand that you do have a copy of our full submission, but we would be delighted to answer any questions that you might have.

CHAIR —One of the issues you raise in your submission is the idea of the government guaranteeing loans to small business. I believe these are in place in various other countries, including the United States and Canada.

Mr Cartwright —Yes.

CHAIR —You say the guarantees should not cover 100 per cent of the loan. In many cases, it is only 75 per cent or 85 per cent, as you say in your submission. Earlier today, though, when we were talking to other witnesses and raised this issue they said that the question has to be asked as to why the individual cannot obtain a loan in any case from a conventional source, and that implies that perhaps they are not creditworthy or the prospect is not regarded as being sound. Even though these loans exist elsewhere, what do you say to that sort of criticism?

Mr Cartwright —I can answer that question from personal experience, having dealt with banks for 20 years as a small business owner and then a large business owner. What they deem to be creditworthy from a business perspective is almost akin to saying that, until you can prove you do not need to borrow the money, we will not lend it to you. Because of the concentration of the provision of finance there is not a lot of competition to change that view of the world. If you need it there are really only a few places you can go to get it. What we are suggesting that a government guarantee would achieve is to essentially create two tiers within the banking system of assessment. There is an assessment which says: under our current banking criteria you make it, anyway, in which case there is a particular percentage cost for that, and that is what the banks currently do. So, one group of small business borrowers will fit within the existing requirements of the banking sector, and they will be granted the loans on as attractive rates as possible. The second tier would be the one secured by the government guarantee, which would see businesses that may not meet the first set of criteria that the banks put forward meet the second criteria, because the banks are more prepared to go to that level because of the existence of the bank guarantee, and there would be a pricing differential associated with access to that second tier of capital. But in our opinion, that is the preferable model to run. There would be no downside for the banks. They essentially would be using the government’s backing in order to extend the level of finance they are prepared to make.

The other point I would make is this. Recently I have had two commercial properties assessed by bank valuers. The valuations that came back were ludicrously low. If that is the premise upon which they then assess what is appropriate to loan money to you, by basing it on a bank valuation of properties and other assets that you have available to secure borrowings, it is no wonder that small business is finding it difficult. Seriously, the valuations that came back on these properties were ludicrous.

Senator WILLIAMS —Commercial or residential?

Mr Cartwright —One was commercial and one was residential. You just sit there and say, ‘I understand that the world has changed and I understand the need to be conservative, but this is 50 per cent of what we paid for the property.’ It is just ludicrous. If that is the way in which the banks are assessing risk, then it is no wonder that finance is tightening up.

CHAIR —What you are really saying is the assessment processes of the banks are too conservative and that there is a niche for this sort of government loan; as you have said, you have some experience of them. Can you tell us a bit about your experience of them?

Mr Cartwright —Certainly. I will tell you one interesting story. In a second company that I built we had a large requirement for cash flow funding, and on any given day we had about $100 million of debtors that we were using to secure borrowings. If you want to scale this back to $10 million—it is identical; our company had grown by this stage to a larger size. At that point we had about $60 million of cash flow funding that we were using against the $100 million of debtors. They were largely blue-chip debtors, BHP, Rio and Qantas. They were not exactly the sorts of companies you have to worry about—although I did say that about Ansett.

In terms of that facility, it had been operational for about 15 years with one of the larger banks. We actually had a proposal from one of the other banks; they thought our balance sheet was undergeared. We had $100 million worth of assets. They were blue-chip assets. The other bank came in and made a proposal to us that we could actually afford to increase our borrowings, because our balance sheet was lazy and they felt that we should take on more debt.

About three months later, after the GFC had suddenly hit, not only did that bank that told us that our balance sheet was lazy suggest to us that they were actually not interested anymore in forwarding any finance to us, but the bank with whom we had the $60 million with the $100 million of coverage also decided that it was not necessarily comfortable providing that level of gearing anymore. You are talking about a significant amount of cover over and above what was being owed to this institution, but the internal policies of the bank simply went conservative. There was no consideration of history, of performance or of creditworthiness. They just changed their policies. It seems to me that coming out the other side the banks have decided that there is an opportunity here to actually gouge some more profit. The way in which small business is now exposed, it is simply an opportunity for them to take some more profit out of small business.

Senator WILLIAMS —In your submission you make many points. One was that it has become apparent in Australian markets that the global financial crisis allowed the major banks to improve their market share and profitability at the expense of smaller banks and financial institutions. You made the point about the spreads and the margins of small business going from 200 to 400 basis points. You go on to say that it is important that the government is proactive in fostering the ability of these small businesses to operate and grow. When interest rates went down—they commenced on 3 September 2008, when I think we had a four per cent reduction—I saw many small businesses and farmers only get two per cent or a 1.75 per cent reduction.

Mr Cartwright —That is correct.

Senator WILLIAMS —You said in your opening statement you believe they were cross-subsidising the home loan portfolio. Are you saying that the banks were losing profit by reducing the home loan rates so they kept the rates up on small and medium businesses to subsidise what they were missing out on with the home loan rates?

Mr Cartwright —I am saying that I think that is what is happening now. I actually do not think it was a large feature of what happened on the way down, but what we are saying is we believe that is what is happening now. The pressure that has been exerted on banks to stay in line with the official—

Senator WILLIAMS —Political pressure?

Mr Cartwright —Political pressure and pressure from the media that the banks are to stay in line with the official increases in interest rates from the RBA; there is a level of cross-subsidisation occurring where business loans are being used to essentially fund some of the increased costs of funding for the banks so they can keep their housing mortgage rates at a lower level.

Senator WILLIAMS —I think this financial year’s forecast is a $21 billion profit for the four major banks, which is pretty good considering the economic conditions we have seen in the last 18 months or so. Do you remember the days of the Commonwealth Development Bank?

Mr Cartwright —Yes.

Senator WILLIAMS —Do you think it was a sad day when it went?

Mr Cartwright —Absolutely. Absolutely.

Senator WILLIAMS —It would be there sponsoring AgQuip Field Days at Gunnedah each year. It was a well-known institution. Did the Commonwealth Development Bank actually take more risk with business? Were they a gamer lending institution that sort of got behind business perhaps more than the traditional bank?

Mr Cartwright —I have no statistical or empirical evidence to give you an answer on that, other than to say that I am aware that Bendigo and Adelaide Bank set up a relationship with Elders to create Rural Bank. I am being told that it is not so much that the lending criteria are different than they would have been if you applied directly to Bendigo and Adelaide Bank, but the representatives who run Rural Bank are much closer to the rural businesses that they provide funding to and therefore can make a better, faster assessment of the reliability of that lender than would be the case where you have centralised banking operations. As we know, most of our banking institutions have gone to much more centralised banking, and so you do not have that personal relationship. You do not have the bank manager who has the history with your company. It is all done by processing of forms, and the difference between that bank that you were referring to and the Rural Bank that has been set up now with Elders is that they are much closer to their clients. Therefore, they can assess the creditworthiness in a much more direct sense.

Senator WILLIAMS —I am going to run an idea past you. You say here—and I think they are very important words—‘It is important that the government is proactive in fostering the ability of these small businesses to operate and grow.’ Imagine if the government made Australia Post a bank, and I say that because I believe their CEO comes from a banking background. Almost every country town in Australia has a post office. I live in Inverell. Little towns like Bingera, Barraba, Ashford, et cetera, could deposit their money there. They could go to a regional centre like Inverell to apply for a loan, et cetera. If the government were to be proactive and issue Australia Post with an ADI licence and actually make them into a bank, that would offer more competition. Perhaps the government could say: you will concentrate especially on small business banking to grow business and to grow jobs, and we know the importance of it. What would your reaction be if I were to suggest to you that perhaps the government should consider licensing Australia Post, which would be backed by the government? It would be safe and secure. It would return more profit to the government; it is owned by the government. What would be your reaction if I ran the idea past you that Australia Post be given a banking licence and set up?

Mr Cartwright —It would explain to me the appointment of the new chief executive, for a start. I might let Mr Orton answer that, because I think he has thought about this issue more than I have.

Mr Orton —Just picking up on what Mr Cartwright has said, the distinguishing factor of the Commonwealth Development Bank and indeed the Elders, Bendigo and Adelaide Bank relationship is the knowledge of individuals making assessments about the businesses and the people.

Senator WILLIAMS —Close to the coalface.

Mr Orton —That is right. That would be the question I would be asking about the Australia Post model in dealing with business lending: to what extent would they already have relationships with businesses and therefore be close enough to them to be able to make quick, insightful judgments? For me, there would be a question mark about that.

Senator WILLIAMS —What if they employed local bank officers from the area who know the area?

Mr Orton —Possibly if they did a deal with somebody who was already working with small businesses, yes. That is not unlike the model that Mr Cartwright outlined, where an existing business that has relationships with and knows local businesses lines up with somebody who has the sources of funding.

Senator WILLIAMS —At least Australia Post would have the infrastructure in place. They have branches everywhere—

Mr Orton —Certainly.

Senator WILLIAMS —They would be at the coalface and would provide competition of a very strong bank backed by the government; would you agree?

Mr Orton —It is certainly an option that is worthy of examination, definitely.

Senator HURLEY —I was working in a couple of merchant banks in the early 1980s. It was in a very junior role a very long time ago. But my memory is not of the Commonwealth Development Bank as particularly active or having branches all over the place.

CHAIR —Did or did not?

Senator HURLEY —Did not.

Mr Orton —I am not personally familiar in a detailed sense with how the development bank worked. But from the bit of research I have been able to do I did get the sense that the people involved in making decisions actually looked at the individual businesses and were not applying sector-wide credit criteria. It is a case of looking at each business’s circumstances on their own merit. I guess whether you do that from afar or whether you do it using people on the ground it perhaps does not matter so much. The point is, though, that you are not applying sector-wide credit criteria that we think is what happens today.

Senator HURLEY —I might do a bit of my own research on that and as to why it was closed down. It seems to me that the model you are proposing for a kind of a guarantee or assistance for small business financing is closer to Canada’s model. You say that the Canadian government guarantees 85 per cent of eligible small business loans. Can you give me a brief rundown on who is eligible for those loans?

Mr Green —To give you a bit of background on the Canadian model, as I understand it from the research we have done, there are some limitations in the Canadian model in terms of small business eligibility. They do have to be for-profit businesses. Not-for-profits and charitable and religious organisations are not eligible. I believe there are also some limits on what the loans can actually be used to finance. They cannot finance goodwill, working capital, inventories, franchise fees or research and development. However, they do provide financing for a range of small businesses for a range of clients.

Senator HURLEY —So, they are limited in what they can finance and the guarantee is provided to small business in exchange for a fee?

Mr Green —That is correct.

Senator HURLEY —Can you tell us how that fee is calculated?

Mr Green —The fee is calculated in Canada by the financial institutions that approve the loan. In Canada the fee, as I understand it, is up to 300 basis points for the government guarantee.

Senator HURLEY —Small business are not going to go there unless they really cannot get anything from the bank, are they?

Mr Green —We would not be proposing that the government guarantee be provided for free and we—

Senator HURLEY —Would you be thinking about 300 basis points?

Mr Green —I notice that the UK, which has another similar scheme, has quite a different pricing arrangement from the Canadian system. Their pricing range is from around 150 to 200 basis points.

Senator HURLEY —In setting this up presumably you would try to keep the bureaucracy at a minimum. Would you see it working from within government or would it be set up as a kind of statutory authority?

Mr Green —I think one of the important principles that we make in our submission is that it is critically important that the bank remains responsible for assessing the small business loans. I do not believe we see a role for the government to play in assessing small business loans. By ensuring that it remains with the bank I think a scheme of this nature minimises the risk of a sort of government failure. I think that is one of the important principles we see; that it is largely an arrangement similar to what already exists. The arrangement remains between the small businesses and the banks. In effect, you have the government stepping in behind the banks almost like an insurance player insuring some portion of a small business loan in exchange for a fee.

Senator HURLEY —Would that not go back to the problem that we have heard on this committee about the wholesale funding guarantee, that it gives an advantage to the banks and so people do not go to other institutions? Would not small business then tend to go to the established banks for financing? We have been talking about improving competition in the banking sector, and so that newer entrants might suffer from that.

Mr Green —Absolutely. We are strongly supportive of increasing levels of competition in the banking sector. What I would say to that is that the wholesale funding guarantee, as I understand it, had different rates based on the strength of the financial institution taking out the wholesale funding guarantee. Indeed, the larger banks were able to access that guarantee on much more favourable terms than the smaller banks. There have certainly been quite persuasive arguments made that that differential in pricing has had the unintended consequence of strengthening the financial position of the large banks relative to the smaller players.

In relation to the government guarantee of a small business loan, we do not see any reason why that facility should be limited in use to only the big four or anything like that. We would see it as something that could be used by a range of players in the banking space.

Senator HURLEY —Conversely, might you not get some financial institutions starting up to try to take advantage of that and be overly generous in their risk assessment to try to get business, with a resulting failure of a large number of businesses and possibly the financial institution itself?

Mr Green —Are you suggesting that you might get a fly-by-nighter bank entering the sector and taking on too much risk?

Senator HURLEY —A financial institution starting up might try to get business and overreach.

Mr Green —I think that is why we have quite a strong presence with APRA ensuring that those sorts of banks that would seek to come in and compete in the market meet prudential standards and cannot take on that level of risk.

Senator HURLEY —Would you see it as an ADI having to set up with all the prudential requirements for that?

Mr Green —I think it could be both the ADI and the non-ADI sector.

Senator HURLEY —A non-ADI would not be covered by APRA.

Mr Green —No. That is correct.

Senator BUSHBY —I note in your submission that you have raised a number of issues in respect of small business financing, some of which has been touched on already. In your opening comments as well you used the term ‘gouging’; that the banks might be gouging profit effectively by shifting risk out of their portfolio. We have had a significant discussion with Westpac and also the ABA earlier today. What they tell us is the reason for the premium in terms of small business loans compared with residential loans, which are both secured, is because of the risk. But if they are shifting the risk out, as you suggest, do you think then that they should perhaps be reducing the premium?

Mr Cartwright —What we are suggesting is that it seems very odd that the level of risk attached and therefore reflected in the pricing of loans has changed by 200 basis points from what it was before we went into the GFC to what it is today, given the strength of the economy.

Senator BUSHBY —That is the first point, that the spread has increased?

Mr Cartwright —Yes.

Senator BUSHBY —But at the same time you are saying that the risk has probably decreased?

Mr Cartwright —I am saying that I do not think the risk profile for small business has changed, despite the increase in margin—

Senator BUSHBY —But the lending criteria have changed.

Mr Cartwright —The lending criteria have changed, and our suggestion is that they may be using some of that additional margin to offset having to hold the line on mortgage rates even though the cost of funding has increased, thereby providing the cross-subsidisation.

Senator BUSHBY —You also mentioned that, in respect of the tighter lending criteria—I am paraphrasing here to some extent so correct me if I am wrong—your analysis reveals a range of instances of banks tightening lending criteria and undermining the viability of otherwise profitable small businesses?

Mr Cartwright —That is correct.

Senator BUSHBY —Are you saying that through the tightening of the lending criteria some profitable small businesses are being undermined in terms of their ongoing viability?

Mr Cartwright —Their viability is being threatened by the changes; that is right.

Senator BUSHBY —You actually provided an example in your opening statement of one where that appeared to be the case.

Mr Cartwright —Yes.

Senator BUSHBY —In respect of this whole inquiry—and you may have been present when I was talking to the previous witness—my major concern is that there are businesses out there that are viable or would be viable if given finance, start-up businesses, but particularly those already in existence. The example you used is a classic example, where they have existing financial arrangements, whether with banks or previously with non-ADIs. They have been operating, paying their bills, making profits, employing people and operating quite successfully and contributing to the Australian economy. Some of these businesses are either facing restrictions on the financial assistance that they can get or alternatively are not able to get continued funding, which threatens their viability.

Mr Cartwright —Yes, that is correct.

Senator BUSHBY —I raised this earlier. I think we have all raised it with witnesses as they have come through today. I think the ABA indicated that you could always find examples like that, but on the whole that is not what is really happening. Is that something that you accept? Are you cherry-picking the examples or is this something that your membership is facing in a more general sense?

Mr Cartwright —We do surveys of our entire membership on a regular basis, and those survey results are absolutely demonstrating that this is an across-the-board problem.

Senator BUSHBY —Do you have any actual survey breakdowns that you can actually provide, the questions asked and the responses that you have received?

Mr Green —I have one I can share with you now if you would like.

Senator BUSHBY —Yes.

Mr Green —Our most recent survey, which was conducted last month, has not been released quite yet. We are just finalising the crunching of the data. But what I can share with you is that 29 per cent of our small business respondents said that their access to finance had deteriorated over the last quarter. Taken in isolation it is difficult to say too much about that. But what I can also say is that when you look at the exact same period 12 months ago, at the height of the GFC, when we asked our constituents that same question again, in March 2009, 33 per cent of small business respondents said that access to finance was an issue for them, or had got more difficult over the past quarter. So, from the darkest days of the GFC till now we have seen only a marginal improvement, from 33 per cent to 29 per cent, and still a very large number of our members saying it is—

Senator BUSHBY —We had evidence earlier today from the AIG. They had conducted a survey as well, but asked a slightly different question. Rather than how has it been over the last quarter, it was what were they anticipating for the coming quarter. They had a similar sort of percentage considering that finance will be an issue for them.

Mr Cartwright —AIG’s membership tends to be a bit larger than ours in many cases.

Senator BUSHBY —In terms of the size of the business?

Mr Cartwright —Yes. In terms of the voice of the small business sector, local chambers and then our regional chambers and ourselves would be an accurate bell weather of what is going on with small business in New South Wales.

Senator HURLEY —What was the percentage before the GFC? Do you go back that far? Unfortunately AIG did not.

Mr Green —Ours does not either, unfortunately.

Senator BUSHBY —Is the fact that you had not been surveying on this particular issue an indication that, from your membership’s perspective, this issue has become worse in the last couple of years?

Mr Orton —Obviously with the advent of the GFC it was clear that, based on previous recessions, there would be difficulty in access to credit. I guess it has become more apparent when you look at the results for the last 12 months that as businesses recover from the immediate impact of the GFC, think more about expansion and the coming good times, the demand for finance becomes greater. I guess the point about that big number in this most recent survey is that these are businesses looking to expand on the upside part of the recovery or the economic cycle. I guess that is why we would say it is a bigger concern than on the downside.

Senator BUSHBY —We have had evidence today that two years ago there was a range of additional options for small businesses looking to finance. A lot of non-ADI options that existed then, with the onset of the global financial crisis, became less viable. And the bank guarantee for ADIs for not non-ADIs was also a nail in the coffin, so to speak, in terms of their ability to be able to fund small businesses. That option no longer exists, or to a far lesser degree than it did, and it may well be rebuilding. But I would suggest it is not rebuilding at a rate that would meet the demand for businesses looking to take advantage of our coming out of the global downturn. What do you think could be done to actually help facilitate non-ADI competition, particularly in the space where small businesses may not meet the tighter lending criteria of banks, which is really where the non-ADIs used to serve? They used to service those small businesses that would not otherwise meet criteria for lending from banks.

Mr Green —I think we have broadly gone through what our proposals are to try to encourage—

Senator BUSHBY —Most of those seem to be ADI related, though.

Mr Green —They are largely ADI related. The other point I would make in relation to them is that they are proposals that I guess will take time to increase competition in the market. Certainly we would be looking for anything we could that would help address competitive issues in the shorter term.

Mr Orton —Certainly one of those issues would be to better inform small business potential borrowers of what the options are, say, for example, factoring and discounting as an alternative source of business finance, which has grown phenomenally in the last 10 years. It did taper off as the GFC hit. One wonders to what extent businesses perhaps consider some of those options as much as they could. There are more providers than there ever used to be. But, on the other hand, maybe there is a little bit of financial literacy education that might help open up some more opportunities that businesses do not think about.

Senator BUSHBY —Do you see a role for your organisation in that?

Mr Orton —Definitely.

Senator BUSHBY —Would you need assistance to do that or is that something you could do with your existing resources?

Mr Orton —I think it is something that government should be taking into account. It certainly puts a lot into financial literacy from the consumer credit point of view. I think some of those arguments probably also apply to small business finance.

Senator BUSHBY —In those recommendations you state the government should put greater pressure on banks to keep small business lending rates down. What sort of pressure could or should they be applying? Should they actually be using regulatory pressure or should they actually be carrying a big stick or just use public pressure?

Mr Cartwright —I think you have seen how effective public pressure has been in the home residential mortgage market area. I think if we heard senior government figures coming out and naming and shaming in the same way they do in the housing market that would be a big step forward.

Senator PRATT —We have talked about the consolidation of banks and a decrease in competition in the lending sector. To what extent do you think that consolidation of the banks and their place in the market has actively contributed to a lack of access to finance?

Mr Cartwright —I think our view is that banking has consolidated in this country. When you see—what did someone the other day refer to it as, a functioning oligarchy, or something—that level of concentration occur then obviously it is going to be an issue in terms of the provision of competition so, yes.

Senator PRATT —To what extent do you think the big four banks are internally competitive against each other in this sector? Our regulators seem to think they are.

Mr Orton —I do not think they would say they are not competitive. I think the issue is more potential competition between the big four oligarchy and whatever else the other options are. That is where the issue is. There are not too many other alternatives.

Senator PRATT —I would be interested in your having a look—hopefully, there will be time before the end of this inquiry once the Hansard becomes available—at the statements of APRA, the Reserve Bank and the ABA in relation to how they have characterised the state of the problem. Because the argument seems to have come out that naturally there will always be isolated cases of businesses that are suffering, but the current assessments are truly based on risk and that is generally why the market has contracted.

Mr Cartwright —We are absolutely happy to look at those comments and give you our further views on it, but can I just say that what we may be seeing here is an overreaction in terms of the change in assessment of risk.

Senator PRATT —It is slightly contradictory. At the same time they are also acknowledging that a lack of competition will naturally tighten up the lending standards. So, it is a bit of a loop.

Mr Orton —Yes, and unfortunately the official data does not tell you about discouraged lenders—those people who do not get into the data collection system and do not make applications for loans. I think that is the sort of thing that our survey does reveal.

Senator PRATT —We seem to have a problem with the data in terms of it not being a true indication of what has happened over the cycle. It was expected that business would find credit more difficult to get, and this is not an unexpected situation. But the extent to which it is legitimate and businesses are not able to get finance they should have access to seems to be underreported, and we have not been able to interrogate that information adequately. Have you any views you would like to put on the record about how that information should be collected in order to mitigate against that in the future?

Mr Cartwright —If we could include those in our response to our review of the other submissions that would be appreciated.

CHAIR —Thank you for appearing today.

[4.14 pm]