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Competition within the Australian banking sector

CHAIR —I welcome representatives from the Australian Chamber of Commerce and Industry. Thank you for attending today. Accept our apologies for holding you up slightly. We hope to make up some time as we go. Would you like to make an opening statement?

Mr Anderson —I thank the Senate for the opportunity. The Senate has received our submission in this inquiry. The submission goes to a range of issues dealing with access to finance, the cost of finance and how a lessening of competition in the post-global financial crisis environment is affecting the small and medium business consumer.

I have with me Mr Holyman, our deputy president; Mr Scobie, a board member and co-chair of our Business Finance Taskforce—both office-bearers of the organisation who are in a position to be able to supplement our submission and our discussion today—and Mr Evans, our Director of Economics and Industry Policy. In view of the time, I will keep my comments very brief. I will hand to Mr Holyman in a moment to advise the Senate of a couple of key features of some additional research that we have provided and undertaken.

There are three things that I would like to impress on you in my opening remarks. Firstly, this is a very real and immediate issue for the small and medium business consumer. It is one which is affecting investment and our capacity as a nation to secure the full benefits of the economic recovery. Secondly, the impact of a lessening of competition in the market is by no means just a consumer issue. It is an issue that is playing out in terms of business finance, and in that respect it is very important that we do not allow costs to simply be transferred from the consumer side of the industry to the business finance side of the industry, because that ends up playing out by affecting investment jobs and ultimately damages consumer and economic activity. Thirdly, there are some significant gaps in the competitive nature of this market which have had direct impacts on the small and medium business sector, and they warrant a policy response by the government and by the parliament.

This is not a case where the government or the parliament is being asked to respond according to some wish list of industry. There are some failures in the proper operation of this market, they are having a practical impact, and a policy response is appropriate. In that respect, a number of the measures which the government has already announced on the business finance side with a view to increasing liquidity and competitiveness in the market are supported by the ACCI. There are a number of additional matters which, as proposed in our submission, we believe ought to be actioned by the government and/or the parliament. With those few remarks, I will ask Mr Holyman to conclude our opening statement by referring to a number of additional matters.

Mr Holyman —The recent VECCI-Victoria University survey on SME access to finance surveyed 284 businesses in Victoria during June and July, and found that 34 per cent of respondents indicated that inadequate access to finance was an obstacle to growth and:

  • 30 per cent of respondents indicated that they had passed up attractive business opportunities in the previous two years …

Basically, this was because (1) attempts to access external finance were unsuccessful, (2) credit was not available in sufficient quantities, (3) finance was too expensive or (4) lending conditions were too strict. We have now organised for this survey to be commissioned across the country, not just Victoria.

It is very clear that the exit of non-bank lenders and foreign banks has meant that small business owners have had to adjust their business strategies. This has involved delaying plans for expansion, downsizing or, in some cases, closing an otherwise viable business. Many niche finance products, such as fit-out finance, which is relied on extensively in the retail sector, simply no longer exist. In my life as a private employer I also chair a retail group with some 80 retail stores, and it is very clear to us that over the last three years the availability of finance to refit those stores has totally vanished from the marketplace. It is a very small example of how the opportunity to invest has diminished; you have to do it out of your own capital resources, which has consequences for both employment and other aspects of the business throughout.

So we think it is vital that this inquiry take steps to provide solutions for business borrowers and does not just focus on mortgage borrowers. Let us remember that lost investment opportunities never show up in economic data, yet they are real—they cost the economy and they cost us jobs. Thank you.

CHAIR —Thank you for those opening remarks. I can assure you that this inquiry is not just focusing on consumers; it is also focusing on the effects of competition, or lack thereof, in the banking industry on business and small business in particular. A number of the questions and comments that have been put over the last few days have addressed that issue to some extent. We are very pleased to have you here to assist us in that regard. Would you classify the banking industry as it stands today as competitive?

Mr Anderson —There is some competition in the industry. This is not a market that is completely absent of competition, but, as our submission shows, the level of competition has waned in the post-global financial crisis environment, as we have seen a number of foreign players exit the market, as we have seen the major institutions take a greater share on the mortgage side of the market and, as Mr Holyman just said, areas such as fit-out finance and export finance have seen significant areas of market failure due to a less competitive environment.

CHAIR —Those last points are more as a consequence of lowering competition rather than—

Mr Anderson —That is right. There are competitive forces, but those competitive forces have waned and they have had a practical deleterious impact on the business market in the private sector.

CHAIR —So you would still classify it as a competitive sector but not as competitive as it was two or three years ago, for a whole host of reasons through the GFC. Some of the evidence we have heard is directly related to the GFC and other evidence is related—and in your submission you probably touch on some of this—to decisions made to address some of the issues during the GFC, like the pricing differential on the wholesale funding guarantee.

Mr Anderson —Yes, that is right, Senator.

Mr Holyman —I would like to add one thing. There is a very large degree of cherry-picking going on within the banking sector. Yes, they are extremely competitive when they have a strong client and they want to pitch for that business. But in the SME market there are a lot of businesses that do not fall into that attractive group. That does not mean they are failures and it does not mean they are failing—they are solid businesses—but they may not have all the levels of security that some of the higher businesses have. In those cases, swapping banks is not an option. Leaving an existing banking institution is not an option and no banks are chasing them. At that level, competition is very sparse.

CHAIR —Most of the regulators have provided evidence to us that, prior to the GFC, competition was for business customers. They would compete to attract the customers. Because of structural changes that have occurred throughout the GFC, competition is now for the funds, with depositors trying to get long-term and short-term funding so that they can lend it out. I guess that plays out in what you are talking about: if they are not competing as hard for the customers, they can be a little bit choosier about whom they provide funds to and the terms upon which they provide those funds.

Mr Scobie —There are regional and rural implications in that bankers are choosing to lend differentially in different marketplaces. In your home state of Tasmania, for example, there has been a 33 per cent downturn in investment in productive plant and equipment. That is shown in the last ABS statistics. That is, in large measure, due to constricting availability of credit.

CHAIR —I am not disagreeing with you, but are you able to provide a reference for the degree to which that is being driven by restricted finance rather than restricted demand?

Mr Scobie —We could provide you with supporting evidence of the causal factors.

CHAIR —Thank you. We have had evidence that, prior to the GFC, a significant driver of competition was coming from the non-bank financial institutions—probably not so much for business, but, to some extent, Aussie, Wizard and RAMS were driving a high degree of competition that led to them gaining a significant market share of the home loan market in the mid-2000s. I presume that had a flow-on effect to other forms of business, particularly in the context where banks and financial institutions were competing for customers rather than the other way around. They have basically completely gone out of the market. Most of the evidence that we have received suggests that it is because they can no longer get funds to lend out, certainly not at a competitive rate. Your submission focuses on securitisation, which is where they got most of their funds from. Do you think that, in the absence of a force like that driving competition—even in the state of competition that we have, which you have indicated is lower than it was—it is likely to be maintained?

Mr Anderson —The level of competition is not going to significantly improve just by relying on the market trying to heal itself. There is an issue about accessing funds but also, on the business side, being able to apply funds to business lending, as distinct from the consumer side. What we have seen is that, by a consequence of foreign players exiting the market, the major institutions have just been more comfortable operating on the consumer side of the market and using available funds at that level. So, even as a consequence of the impact on those mutuals on the mortgage side, there has been the spillover effect on the business consumer side, and that is that the major institutions do not see a particular competitive need to come to the table on some areas of business finance.

On export finance: this is an area where the banks have been able to make their own judgment that they do not need to actually play in that game, (a) because it is safer to play in the game on the mortgage side and (b) because there are not competitive pressures which are bringing them to that table. I might ask Mr Evans to just add to those remarks.

Mr Evans —I support those comments. With respect to business lending, it has been particularly the exiting of foreign banks—not because they were having credit difficulties in Australia but because their parents were having difficulties elsewhere—and the non-bank lenders but also, importantly, as the deputy president mentioned, in niche areas, and particularly in lease financing, it has become a lot less competitive. That has an impact on the extent to which you can invest in plant and equipment. In fact, one of our survey questions at the time the government introduced the accelerated investment allowance was: ‘To what extent have you been impeded investing in plant and equipment as a result of not being able to obtain finance?’ It was quite high, the number of respondents who had difficulty taking advantage of that government initiative due to difficulties in obtaining finance.

CHAIR —I am aware that we have limited time, and I do have a few questions I want to ask. You have a number of recommendations as to how we can move forward from that. As you mentioned in your opening statement, they include covered bonds, which I think have bipartisan support, and even the involvement of the AOFM, which also has bipartisan support. Indeed, that was originally proposed by the coalition. One of your recommendations that I find quite interesting is the temporary small business loan guarantee scheme. Would you care to outline what you mean by that, how that could work and what the risks might be to government, which from a legislator’s perspective is obviously an important issue?

Mr Anderson —There are schemes of this nature in a number of other industrialised nations—Canada, the United States, the United Kingdom—that are worthy of some serious assessment at the very least. What governments in those jurisdictions have done is to provide some mechanisms for government to provide some guarantees on small business loans where there is some clearly demonstrated market failure that is not being met by the market. They are all subject to some significant caveats and conditions, and we do not walk away from those caveats and conditions, because it is critical that the government, on behalf of the taxpayer, does not put itself at risk in this area. We would not want that either. So all decisions that are made in respect of this policy initiative would have to be prudentially made. But, where there is a market gap, then there is at the very least, I think, a reasonable case for the government to assess what is happening in this respect in those other nations and identify its applicability to the Australian circumstance, because this is not a case, as we said, where the market is just going to heal itself.

To give you an illustration of what is evidence of a market gap: in Australia—and our submission references this—63 per cent of small and medium business owners are now using their credit card facility as a form of business finance. That is extremely high by international standards.

Senator XENOPHON —At 21 per cent or whatever?

Mr Anderson —At extremely high rates, that is correct, with all of the costs associated with that. If we have a situation where small and medium businesses are having to resort to credit cards to secure credit, then that is prima facie an indication that there is some market failure that warrants a proposal like this being looked at. That is what we are asking government to do as the first step. We do not want the government to undertake non-prudential practices at all but we do want the government to ensure that every stone is turned to see whether or not we can do something to improve competitive pressures in this market.

CHAIR —Your recommendations once again reflect to some extent the reform announced by Swan, the Treasurer, on Sunday but they do not, as you noted, incorporate all of them. Some of them have been welcomed by both sides of politics, others less so. In one of your recommendations, recommendation 8, you note that ‘lenders should only be allowed to charge loan exit fees on a cost recovery basis’. The Treasurer has gone further than that and is going to ban exit fees altogether. Is that something you support, or do you think a cost recovery basis is the right way to deal with it?

Mr Anderson —I will ask Mr Evans to comment on that, but we have a clear view.

Mr Evans —Senator, as you indicated, our view is that it should be on a cost recovery basis. Our concern is the unintended implications if you do otherwise. In fact, you may adversely impact those borrowers who are still with an institution and pass those costs on to existing borrowers. We believe this is not an opportunity for fee gouging from the banks but it should simply reflect the costs associated with discharging a mortgage and the like.

CHAIR —I do not want to labour it, but some of the evidence we have received suggests that most of the costs are upfront. In the past a lot of financial institutions would hit the borrower upfront with a fee, and as a way of avoiding having to charge that fee and making it easier for consumers they defer it. A lot of these exit fees are actually deferred application fees—that is how they sell them—which are not payable if you stay with them for a certain period of time. Do your comments hold if that is the case as well? Are they recovering the reasonable costs? Is it a cost recovery basis?

Mr Evans —If you operate on the basis of having transparent pricing at all points in the transaction, that would generally deliver the best result.

CHAIR —My final question, given the time, is this. In recommendation 10 you recommend that there be a Productivity Commission inquiry into the degree of competition. There have been calls, particularly from certain politicians, for a broadscale inquiry looking at the whole of the financial industry and banking industry in the terms of a Campbell or Wallis type of inquiry. Do you think that the sort of inquiry that you are talking about there could be incorporated into a broader such inquiry? As a separate issue, do you think such a broader inquiry would be valuable?

Mr Anderson —The difficulty with a broader Wallis style inquiry is simply that they tend to take an enormous amount of time because the scope of those inquiries covers so much ground. What we are trying to do here is to identify the fact that there are certain specific matters that do warrant some further consideration. We have just discussed, for example, the small business loan guarantee—

CHAIR —And the Productivity Commission is well placed to do that.

Mr Anderson —and a Productivity Commission inquiry with a specific remit has the potential to bring about a result and some recommendations earlier in the piece. We are not opposed to incorporating that issue into a broader inquiry, but this is a pressing issue. This is not something which just requires assessment from an intellectual point of view or a system design point of view. There are structural problems that are playing out now in the market.

CHAIR —That answers the question of whether it could be incorporated, to some extent. There might be some timing issues, but in terms of the broader inquiry itself as a separate issue?

Mr Anderson —There could well be a broader inquiry. We are not opposed to that and we would fully participate in it. These are matters that bear directly on our economic capacity and our future economic structure. But the priority is to take steps which will help bring about greater liquidity and competition in this market now because, as the research and the survey results that Mr Holyman has referred to show, this is an immediate issue that is playing out in the market and it is not healing itself sufficiently to allow this to continue unattended to by the parliament or the government.

Senator HURLEY —We have done the small business inquiry on this committee; we know that there are a number of difficulties in the small business community. We keep hearing from the banks that things are getting better and they tell us that they are lending quite well to the small business sector at this stage. But we are also hearing other evidence from the banks. The ANZ noted in its submission:

... the number of small business customers who are 90 or more days past due on their credit facility has increased as a result of the financial crisis

and ANZ claims that in its small business banking segment the delinquency rate has more than doubled since 2007. The information that you have about small business using their credit cards does indicate that there are at least cash flow problems and maybe some more serious problems within some businesses.

I do think that small businesses have suffered from banks closing down and not lending to more risky customers, even if they are only slightly more risky. But, rather than direct money to areas such as assisting, with government moneys, small businesses to get loans and putting pressure on the banks, would it not be better to provide that money directly to businesses to look at how their businesses operate?

Mr Anderson —They are not mutually exclusive goals. There is no question that there are risks associated with business lending; there always have been. The question before this committee is whether or not a reduction in competition is creating a greater problem in that respect than there has previously been and whether people who have credible cases for access to business finance are being denied because of risk rating by the institutions.

Our concerns, which we express in our submission, are that businesses with a long history of relationships with their institutions are being denied applications for credit even in profitable circumstances. So it is not a case of saying: ‘Let’s put all of our focus on trying to improve the capacity of businesses to understand what they need to bring to the table when they have a discussion with their banks.’ It is also a case of asking: ‘Have banks acted responsibly in re-rating those risk factors and putting some of the costs on the business side of the equation from the consumer side of lending?’ The overwhelming evidence is that banks have gone beyond what is reasonable in both of those regards.

Mr Holyman —Again, one tends to relate as much as possible to the feedback we are getting and our own experiences in the real world. I think if the banks were asked about their frequency of auditing SMEs and putting them under pressure, you would find that that number would have tripled from what it was three years ago. They are sending in auditors. If you put in an application to extend your financial arrangements to do some investment or acquire acquisition in the business, the credit processes that you go through these days are to some degree untenable. There is simply no inducement anywhere that we see in the system for banks to think otherwise; it is not that they do not need to take any further opportunistic chances. They are putting a lot of barriers up for any expansion of facilities. That is definitely happening out there today.

Senator HURLEY —I take your point on that. Indeed, that is anecdotal evidence from people I know who have had a long history of dealing with banks and found that conditions have tightened considerably.

Mr Holyman —It is not about the businesses being successful or not. It is process driven.

Senator HURLEY —That is right. In your recommendations I think you have rightly focused on developing that other funding level to enable competitors to come back into the market—or at least for those financiers that are there to reduce their costs so that they can start to lend at lower rates or reduce their conditions.

Mr Scobie —In that context, you have had the withdrawal of the international banks, in large measure, which has reduced direct competition in that space, and it is a known phenomenon. To assume that local, second-tier institutions are going to be able to move from being principally mortgagee lenders and into the business banking space in a timely manner is not an adequate solution to the problem. Those regional banks, and other mutuals et cetera, that have been alluded to—and which may or may not be helped by the securitisation or the covered bond solution to the problem—do not have, in and of themselves, the capacity to move into the provisioning of those services easily. There is certainly considerably more that needs to be done to allow them to have the capability to meet the demands of the marketplace. Without doing so and with fiscal and monetary policy being determined, at the moment, in the light of the resources sector’s super cycle that we are now on, we run the real risk, systemically, over time—and that is why we have called for a Productivity Commission inquiry—of actually reducing the breadth and depth of the Australian economy and really negatively impacting on regional and rural Australia, in particular, and our capacity to prosper beyond the end of the super cycle. As Glenn Stevens said publicly, recently, Australia has a fantastic capacity to manage adversity. We do not manage our prosperity anywhere near so well. And right now we appear to be running the risk of doing precisely that.

Senator HURLEY —You identified where I was getting to with my question. It is hard to see those second-tier banks—in particular, the credit unions and mutuals—stepping into this breach. I was wondering if you were hoping that the majors would come back, or if you were looking to foreign banks to come back.

Mr Scobie —Without directly addressing things, at the moment you have, with the covered bond initiative, a fairly limited and not deep enough initiative to that degree, insofar as it is going to AAA rating. Most of the regional banks are not in that position. Consequently, this is in fact further reinforcing the position of the big four banks and not increasing the capacity of the regional banks and other mutuals to meet the needs of the business community and step into the breach—the structural failure that is occurring at the moment.

Senator HURLEY —I am just wondering if your best position is not to give the majors more profitability, to strengthen them.

Mr Anderson —There are two objectives here that we should be working towards. One is to add liquidity to the market, whether it is a pool of funds which can be accessed by majors or second-tier banks. If you add liquidity to the market then you provide greater capacity for the flow of finance and the necessary capital to grow the economy. The second is to add competitive pressures, forces within the market, and the second-tier institutions are part of that equation. For example, if you equalise the cost arrangements in respect of the wholesale funding guarantee, that is going to be a direct advantage to those second-tier institutions, and they would have the capacity to flow that through. That might not increase the pool, but it certainly would allow them to compete more actively on price.

Senator PRATT —I want to ask what your overall impression of the banking package is, in terms of the elements of it that you think will be of assistance.

Mr Anderson —We have indicated that the package that has been announced has a number of desirable features, particularly on the business side. It does not, however, meet all of the needs of the small and medium business sector. There are a number of additional matters, as Senator Bushby has alluded to, that are in our submission that have not been included in the package, and which we commend to this committee and which we believe ought to be recommended to the government and the parliament.

Senator PRATT —There are elements that you do believe are pro-competitive. Specifically, what do you think benefits small and medium businesses? What benefits will be extended to them?

Mr Anderson —I will ask Mr Evans just to comment on a couple of those details.

Mr Evans —I think principally they were the issues that added liquidity in the market, and that related principally to the initiative with regard to the residential mortgage backed securities—the additional funding there—but also the introduction of innovation in the marketplace for the issuance of covered bonds. So I think it was those issues, with respect to business; adding liquidity in the marketplace was the most welcomed aspect.

Senator PRATT —So, in that sense, you would agree with what the lender RESIMAC has said: that the RMBS market has been vital to permitting the continued flow of finance to the small-business community?

Mr Evans —Principally, the RMBS market is mostly about providing mortgage lending for households, but to a great extent it is also used by the small-business sector. So any benefit there is welcome.

Senator PRATT —Resimac asserted that there would be thousands of businesses without access to finance without the support of the RMBS. Would you agree with that statement?

Mr Scobie —The reality is that of course it is the case that there are many hundreds of thousands of businesses in Australia and many of them borrow secured by mortgage-backed borrowing.

Senator PRATT —That is right.

Mr Scobie —It is the only way for many small businesses that they can borrow. So it is self-evident to that degree. However, that would have been the case under any circumstance.

Senator PRATT —Yes. We have had a lot of debate about competition in banking and people seem to be conflating, in some instances, competition with bringing interest rates down. I want to ask where you think small-business sits currently in terms of things in the economy which are putting upward pressure on interest rates. I come from Western Australia where there is a significant skill shortage emerging. It seems to me that there is some trouble distinguishing in the debate about competition between banks and some of the other precious small businesses are likely to face where some parts of the economy booming but you still have small business struggling to access finance in some instances.

Mr Anderson —There is an issue of access but there is also the issue of cost. It is very clear for us to say to this committee today that the lessening in competition has had a deleterious effect on the cost of finance to small and medium businesses. It is not just a question of access. With the lessening of competition, major institutions are in a much better position to state their price. Having said that, there are a number of other factors in the economy which are putting pressure on interest rates. You have mentioned the pressure on capacity and skill shortages, the level of government expenditure and our willingness as a nation to bring our budget back into surplus in good time all bear on the question of setting of interest rates. We have, as a result of the lessening of competition, seen a significant impact on the cost side for small and medium business lending and it has been a disproportionate effect compared to what has happened on the consumer side. The small and medium business sectors have borne the brunt of tighter credit conditions in Australia.

Senator PRATT —I think it is worth having your organisation distinguish and separate out the elements of that debate and put them on the record for the purpose of this inquiry. Thank you.

CHAIR —Thank you to the Australian Chamber of Commerce and Industry for your assistance today.

[3.30 pm]