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Foreign Affairs, Defence and Trade Legislation Committee
06/05/2016
Estimates
FOREIGN AFFAIRS PORTFOLIO
Export Finance and Insurance Corporation

Export Finance and Insurance Corporation

[20:03]

CHAIR: I welcome Mr Andrew Hunter, Managing Director and CEO of the Export Finance and Insurance Corporation, and officers of your organisation. Do you have an opening statement for us?

Mr Hunter : Thanks for the welcome, Chair. No, I do not have an opening statement.

CHAIR: Very well. I will go to questions. Senator Wong.

Senator WONG: Thank you. Mr Hunter, I want to ask you a question about the new small business export loan product. I understand from the website that Efic will provide unsecured loans of between $50,000 and $250,000 for small businesses to support export contracts. These loans are for businesses who have been unable to gain private finance. The focus will be on borrowers' ability to service the loan rather than how much security they can provide. Can you tell me how this new product was developed?

Mr Hunter : In March last year, the government gave us broader lending flexibility to enable us to provide loans to small businesses—working capital in particular. Some of the feedback we got when we put that product out in the market—it has been a successful product. This year we have done 46 loans to small businesses, worth $32 million and we have been able to turn those loans around in 47 days. So it has been a successful product. The feedback we got from the very small exporters—the people who have been turning over less than $5 million—is that they were looking for three things: they wanted a product that was completely unsecured; they wanted a product that was relatively simple and that they could apply for online; and they wanted a relatively quick approval process. We are now offering all three of those product features and are able to provide funding within nine business days of application.

Senator WONG: Was the product an initiative of Efic or developed at the request of the government.

Mr Hunter : It was an initiative of Efic.

Senator WONG: Was a cabinet decision required for Efic to proceed with development of this product?

Mr Hunter : No, there was not.

Senator WONG: Efic's rationale is to address market failure in export finance, rather than compete with existing financial providers.

Mr Hunter : That is right.

Senator WONG: Can you explain to me, if you have been approached by a business that is not able to gain finance through other means, how you determine whether that is actually market failure as opposed to their being a poor credit risk?

Mr Hunter : I assume your question is a broad question around our SME portfolio rather than specifically around the new product?

Senator WONG: I think the new product, given it is unsecured. I was primarily focusing on that. How do you determine whether it is market failure or they are just not a good bet?

Mr Hunter : That is one of the risks we have to assess. Stepping back and looking at our business more broadly, we support people who have won export contracts. I would not say we pick winners, but, rather, we back winners. We are supporting people who have gone off into the international market; they have competed on the world stage; they have won an export contract; and they have come back to their bank and said, 'Great news! I'm the best in the world at what I do. I've won an export contract. Can you give me some working capital.' What banks typically look for when they are backing SMEs is collateral. They ask, 'What sort of commercial property can you offer me as security? What sort of residential property can you offer as security?' Where an SME is unable to offer that security, that is where we deem there to be a market failure. The SME in our eyes is a winner. It has won an export contract but has been unable to raise its funding. In our view, we are not picking the winner; we are backing the winner. That is in our view a gap in the market.

Senator WONG: What are the credit assessments that would be conducted?

Mr Hunter : Typically, the vast majority of what we do in the SME space is unsecured in terms of commercial and residential real estate. We are assessing whether the client has an export contract; have they the technical capability and history in completing such a contract; have they exported to that market before; and what is the quality of management. We also look at the ability of the company to manage its working capital through the duration of that export contract and we look at it broadly as a going concern. What we do not do, which differentiates us from the banking market, is evaluate the quality of the collateral that the business has to offer. We evaluate the quality of the business and the technical capability of the management.

Senator WONG: Can you tell me how the risk to the Commonwealth is managed and what you expect the risk profile to be for firms accessing the product.

Mr Hunter : Sorry, I missed the first part of the question.

Senator WONG: Management of risk to the Commonwealth—tell me how you manage that.

Mr Hunter : How we manage the risks of what we are writing?

Senator WONG: Yes.

Mr Hunter : We do an initial assessment of every application that we get, we meet with management, we ask them for financial information, we ask about their history in that particular export market, we ask for a copy of the export contract and we look at whether or not they have executed similar export contracts in the past. If they can demonstrate to us that they have technical capability in a particular area, and that they have the wherewithal financially to execute that contract, that tends to satisfy our credit criteria. To give you an indication of where we are in terms of performance, last year we did not have a single default in our SME portfolio. For the 2014-15 financial year, we did not have a single default. This year we have had three or four defaults in our portfolio. The reason we have had a larger number of defaults is that we are now supporting smaller exporters—people who are turning over less money.

Senator WONG: What I am a little confused about is how you can do the meetings with management and the sorts of investigations or inquiries that you have described when the product you are talking about is an online application.

Mr Hunter : For the online product specifically, we do not intend to meet with the clients. We will do a desktop analysis, we will get a copy of the export contract, we will see whether or not they have exported to that market before and we will look at their financial cash flows and see whether or not they have demonstrated that they have the cash flow to perform under the contract. I guess the only thing that is missing from our normal process is a meeting with the CEO and the CFO.

Senator WONG: You will be loaning taxpayers' money without even meeting with the firm?

Mr Hunter : We go through a full process around KYC—

Senator WONG: I think the answer is yes.

Mr Hunter : Correct. There will be instances where we will not have met with the company.

Senator WONG: Well, in respect of the product about which I am asking questions, what you told me was that it was online. The default will be that there would be no meeting. I just question whether or not that will be sufficient risk management, given that you are saying, 'We are going to focus on ability to service; we are not going to look at security.' These are unsecured. 'We are going to do it quickly and online.' It just seems to be a recipe for potential problems, doesn't it?

Mr Hunter : That is exactly the risk that we have evaluated. But will I come back to first principles. First principles are that we are not picking winners; we are backing winners.

Senator WONG: With respect, that sounds like a slogan.

Mr Hunter : I am trying to answer your question.

Senator WONG: All I am asking is: do you think an online application for an unsecured loan from someone you have never seen is sufficient risk management for you to make a decision to lend them some taxpayers' money?

Mr Hunter : If I can answer your question—

Senator WONG: Sure, just don't do the 'backing winners' thing.

Senator McGrath: What is wrong with backing winners? Why don't you like winners?

Senator WONG: It is not that. I just think it is a slogan. I like winners. I hope we are winners soon.

Senator McGrath: Well, you might be disappointed.

Mr Hunter : The process we go through is, first and foremost, has the client got an export contract? The history that we have in our business is that people who go out overseas and win an export contract typically are very good at what they do. In fact, not only are they good at what they do; they are often amongst the best in the world at what they do. So that is the first qualification. We have people who have successful domestic businesses, and what they are lacking is collateral. The reason the private market does not support them is that they are lacking collateral.

Senator WONG: Frankly, this is a rerun of what you told me at the start, but I was asking a different question.

Mr Hunter : In my view, the process that we are going through online is ticking 90 per cent of the boxes that are important in our credit assessment, and the one and only thing we are not doing is meeting every single applicant.

Senator WONG: I think I asked you what you think the risk profile for the customers accessing this product would be.

Mr Hunter : We think they will be the same as the other SMEs who come to us. It is just that they are smaller and have smaller funding requirements.

Senator WONG: Is the total allocation for this product capped? How much are you saying that you will lend in this product?

Mr Hunter : We do not have a cap.

Senator WONG: It is uncapped?

Mr Hunter : It is uncapped. Also, we have $650 million worth of capital.

Senator WONG: You do not; it is the taxpayers actually.

Mr Hunter : It is.

Senator WONG: Yes.

Mr Hunter : We take every responsibility and all care in looking after that capital.

Senator WONG: Can you tell me what your assumptions are about the proportion of loans that you expect to be in difficulty, in arrears or in default?

Mr Hunter : We are estimating six per cent of the value of the loans that we provide under this product will suffer from a default, and that is factored into our business plan.

Senator WONG: What are you factoring in for right offs?

Mr Hunter : Of those defaults, we assume that 85 per cent will be unable to pay us back.

Senator WONG: That is 85 per cent of six per cent?

Mr Hunter : That is correct.

Senator WONG: The interest rates are higher than for rates for unsecured bank overdrafts?

Mr Hunter : They are.

Senator WONG: So what interest rates will be charged?

Mr Hunter : It is about 11¼ per cent.

Senator WONG: The product was launched in March of last year?

Mr Hunter : No, the product was launched at the end of March this year.

Senator WONG: How many loan applications have there been since the launch?

Mr Hunter : We have had 53 applications and we have approved one loan so far.

Senator WONG: Fifty-three applications comprising how much?

Mr Hunter : The average application amount has been $147,000 and the value of the loan we have approved is for $65,000.

Senator WONG: Sixty-five thousand dollars?

Mr Hunter : That is correct.

Senator WONG: And the total value of the loans sought in the 53? I can just times it, but what is the total amount?

Mr Hunter : Do you want me to do the calculation?

Senator WONG: So it is 53 times $147,000?

Mr Hunter : Yes, 53 times $147,000.

Senator WONG: . You do not have the figure there?

Mr Hunter : No.

Senator WONG: To be clear, six per cent sounds small but it is six per cent that is uncapped. Are you really saying that you would be prepared, if the market sought it, to have 40 per cent or 50 per cent of your capital tied up in this product?

Mr Hunter : It could get to that level. Remember we are a market-gap player and there are 33,000 exporters who turnover less than $5 million. Our anticipation, based on the interest we have seen in the product, is that we will see the portfolio in 12 months' time at about 50 million

Senator WONG: Why will you not cap it? Would that not be sensible? What was your total capital?

Mr Hunter : Six hundred and fifty million dollars.

Senator WONG: Why would you not say that this is a new product, it is unsecured, we are going to do it online and we are going to say up to this amount, rather than saying, 'We will leave it demand driven.' Is that not a sensible risk management strategy?

Mr Hunter : I look at the performance of our existing portfolio. We do not think that the characteristics of the exporters who apply for a small business export loans online are any different from the characteristics of the SMEs who apply for our export contract loans. They are the same types of exporters. They just have smaller contracts and they have smaller sums of money.

Senator WONG: But this is unsecured.

Mr Hunter : But that is the vast majority of the loans that we are providing to all SMEs. The security is actually no different.

Senator WONG: Of the 53, how many have been processed?

Mr Hunter : We have only processed one through to the end.

Senator WONG: How many have been determined? Were 52 rejected?

Mr Hunter : They are in the process. We have only rejected one.

Senator WONG: You have rejected one?

Mr Hunter : Correct.

Senator WONG: Of how many?

Mr Hunter : There have been 53 applications. We have rejected one, we have approved one and the others are in the process of application.

Senator WONG: So 51 are still in the process?

Mr Hunter : Yes. So what could happen is that someone applied for a loan and then they decide not to progress it but they have not dropped out of the system yet.

Senator WONG: That is all I have.

CHAIR: Thank you very much. That concludes our examination of the Export Finance and Insurance Corporation. Thank you, Mr Hunter and your colleagues. The committee will now examine the budget estimates of the Australian Trade and Investment Commission and Tourism Australia. I welcome to the table Mr Gosper and officers from the Australian Trade and Investment Commission. I also welcome Mr John O'Sullivan, managing director of Tourism Australia, and his officers.