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Address to the Australian Banking and Finance Corporate and Business Banking Forum 2010, Sydney



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Senator the Hon Nick Sherry Minister for Small Business, Minister Assisting the Minister for Tourism, Senator for Tasmania

Senator the Hon Nick Sherry

13 Oct 2010

ADDRESS TO THE AUSTRALIAN BANKING AND FINANCE CORPORATE AND BUSINESS BANKING FORUM 2010

Sydney, NSW

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It is a pleasure to be with you - in my new capacity as Minister for Small Business.

In the short time I have been in the job a couple of things have been reinforced in my mind.

First, small businesses are the life-blood of the Australian economy - and access to funding for growth is the life-blood of small businesses.

• Small businesses provide jobs for nearly five million Australians. • And they contribute around one-third of private industry value added.

In total, there are more than1.9 million small businesses right around the country.

By any measure, they are the bedrock of a dynamic, innovative and resilient Australian economy.

Over the last few years, small businesses have been under real pressure.

But they have weathered a global recession in a much better position than their peers in other developed economies.

Here in Australia the collapse of Lehman Brothers seems a long time ago, but it was only two short years ago that it triggered the global financial crisis.

The ensuing recession created some of the toughest conditions for

business since the great depression.

The global recession threatened the stability and security of our entire economic system.

Of course, we did not experience a recession here and in many regards, it has been the resilience of the small business sector that has kept our economy moving and kept people in jobs. And the Government’s stimulus packages have played a vital role in keeping small businesses in work, especially in the construction and retail sectors.

The government’s bank guarantees also supported the flow of credit to small businesses across Australia.

Without our guarantees, Australia’s banks would have lent less to small business and interest rates for small businesses would have been higher.

But despite our national economic successes, we understand many small businesses are still doing it tough and some are still finding access to credit difficult.

As I have said, small businesses cannot prosper and grow without adequate access to finance.

So - the second thing that has been confirmed to me is the key role the banking and finance sector has in facilitating the ongoing health of the small business sector and maintaining the overall strength of the economy.

Importance of Finance to Small Business

Of course, finance issues have always been important to the small business community.

An ACCI survey taken before the election reported that one in three small businesses held major concerns about the availability of finance.

Similarly, COSBOA’s 2010 Back to Business Survey found that 75 per cent of businesses were concerned about the cost of finance and 81 per cent were concerned about a potential rise in interest rates.

So we know - both empirically and intuitively - that finance is a burning issue for small business.

The inter-relationship between small business and the banking sector is complicated, but important.

Each sector is valuable to each other - and it is critical the relationship remains productive and matters of concern are resolved as effectively as possible.

I acknowledge that this will not always be easy to do.

The issues involved are complex and multifaceted - and often there is more grey than black or white.

Today, I want to discuss some of the key challenges faced by small business and outline what the government is doing to address them.

Cash Flow Management

A healthy cash flow is essential for any business.

In recent times we have seen a shift away from bank credit.

A recent survey published by CPA Australia suggests the proportion of businesses that required additional funds to support their operations outside of existing cash reserves declined from 30 per cent in 2007-08 to 21 per cent in 2008-09.

And there is some evidence that when finance is required, small businesses are relying less upon bank finance.

In 2008-09, only 50 per cent of those businesses requiring additional funding obtained it through a bank.

This compares to 68 per cent in 2007-08.

It seems that small businesses are increasingly relying upon operating reserves and retained earnings.

This may well reflect a degree of caution following the global recession.

In addition, some businesses may have shifted towards relying on their own funds because of difficulties obtaining credit on acceptable terms.

Access to Credit

Business credit is an area which experienced a readjustment in the fallout from the global recession.

From a peak growth rate of around 20 per cent in 2007, the value of business credit outstanding has contracted by nearly eight per cent over the past year.

Much of this can be attributed to factors such as:

• a heightened risk aversion by lenders; • lower loan-to-valuation ratios; • stricter collateral requirements; • introduction of the Basel II requirements - which are now under

revision as Basel III; and • the shrinking of non-bank financial institutions, regional banks and departure of foreign banks - before the GFC these sources provided around one third of small business funding.

I know small businesses have been concerned about the tightening of lending criteria and demands for greater security.

These developments aren’t entirely unexpected given the gravity of the global financial crisis.

However, one benefit for small businesses has been the loosening of monetary policy during the global recession, with the variable rate for small business loans falling by up to three percentage points.

Higher Risk Premiums on Business Loans

Lately, the ebb and flow of interest rates has become somewhat of a national obsession.

It seems everyone has a view and tale to tell.

Small business owners are no different.

Many feel hard done by that rate cuts are not always fully passed on - while rate rises are always factored in immediately.

I appreciate factors such as higher funding costs of business loans and the repricing of risk can affect how banks deal with interest rate cuts.

But the fact is many small business people feel aggrieved when they don’t see the benefit of lower rates.

This is an issue that creates friction in their relationship with the banking sector.

Role of Banking and Financial Sector

There also seems to be no shortage of commentary about the roles and responsibilities of the banking and finance sector.

Too often there is a tendency to immediately blame the banks for everything.

This is not entirely fair.

The professionalism and integrity of Australia’s banking and finance sector is world class.

The way we came through the global recession also says a great deal about the responsible lending and financial management practices of our banking and finance institutions.

And it reflects well on the entire system of checks and balances the government has in place.

Government Support for Small Business

I firmly believe governments have a legitimate role in addressing the challenges faced by small business.

This is why we are giving small businesses an instant write off of assets valued up to $5,000.

This will provide a boost to cash flow and, by removing the need to apply for different depreciation schedules, it will cut red tape. We want business people to be running their businesses - not wading through endless paperwork.

We are also giving incorporated small businesses a head start by lowering their company tax rate to 29 percent from 1 July 2012 - a year before this rate comes into effect for larger companies.

This is the sort of tangible incentive that small businesses need - to help them retain profits, to grow and ultimately increase our standard of living.

Let’s be very clear - this government is committed to lower company taxes.

Lowering business taxes creates an environment where businesses are more competitive, more prosperous and able to reap the benefits of their hard work.

Of course, we do realise some businesses are doing it tough and are having trouble meeting their tax obligations.

That is why we have extended for another year measures to help small

businesses who are having trouble paying their tax.

Under these measures, small business can enter into a tax free debt repayment arrangements to help them through difficult times.

We have also introduced the Small Business Assistance Program.

This initiative provides expert one-on-one assistance to work with small businesses in distress to help them remain viable and in the tax system.

Ultimately, this results in a win for business and a win for all Australian taxpayers.

The government is also introducing other measures to make our taxation regime more business friendly.

Interest on withholding tax will be phased down from 2013-14. This will allow banks to lend to Australian businesses at more competitive rates and it will bring Australia's tax treatment of Commonwealth Government Securities into line with most other countries, including the United States and the United Kingdom.

In a move to encourage savings and assist smaller lenders to raise funds locally - a 50 per cent discount will apply on up to $1,000 of interest income earned from deposits in banks, building societies and credit

unions.

I’d like to also mention the Small Business Support Line.

This free service provides a one-stop-shop where small business can get in touch with specialist advisers - on the entire range of issues facing small businesses.

The line has been highly successful - taking over 18,000 calls since it was established in September 2009.

Not surprisingly, access to finance is a common theme of many calls - we are able to put these callers through to specialist advisors and get them on the right track.

Integrated into the support line will be the credit complaints clearing house. Its role is to receive complaints about access to and the cost of bank finance.

The Gillard Government is also supporting small business’ access to finance through our second $8 billion investment in Triple-A rated RMBS.

It’s expected that some 10 percent of funds already invested from this second $8 billion program have been lent to Australian small businesses.

Small lender RESIMAC said our support for the RMBS market has "been vital to permitting a continual flow of finance to the small business community”.

We’ll continue to support Australian small businesses as they move forward - so they can grow and thrive, and offer security of employment for more Australian workers.

Of course, no government can wave a magic wand to return to the financial system as it was three years ago.

But there are signs that small business lending is growing again.

According to RBA data for new business lending under $2 million, loans to small businesses made up 29 per cent of all new business loans approved in the past year. That is around the trend average - excluding the phenomenal growth preceding the global financial crisis.

In March 2008, small business lending reached a low of 19.9 per cent of all new business loans approved.

In total, banks approved $74.4 billion in small business loans in the 12 months to June 2010, compared $72 billion in the months to March and $70 billion in the 12 months to December 2009.

Conclusion

Small businesses are important to Australia on many levels.

The jobs they create, the wealth they generate and the goods and services they produce all contribute to a prosperous, dynamic and innovative Australian society.

My message here today is that everyone in this room has a role to play in keeping our small business sector strong.

Access to finance provides the essential nourishment that sustains small businesses right across the country.

In that context, I would encourage the providers of finance to get even closer than ever to small business and to “walk a mile in their shoes” at the individual business level.

This is particularly important as small business look for finance that has

not been adequately replaced with the demise of securitisation following on from the GFC.

I would urge lenders to look to fill the gap in funding as much as the regulators will permit in a competition sense and to price the risk realistically.

My understanding is that currently lenders who are filling the gap left by the loss of securitisation are adding an extra risk premium because of a lack of knowledge of the specific businesses. It is this information gap that I would like to see the lenders close, so that risk can be more

appropriately priced.

Naturally, there are issues we need to work through - but overall the Australian banking and finance sector can be proud of the course it charted through the difficult days of the global recession. The beneficiaries of the survival of the Australian financial system during the maelstrom of the global recession have been the Australian people, whether they are wage earners, small businesses or large companies.

I want to assure you that this government:

• recognises the good work of the banking and finance sector; • is always ready and open to listen to your concerns; and • is willing to work with you as you serve the needs of small businesses and of the entire Australian community.

I wish you and this conference every success.

Thank you