Is the Australian Business Securitisation Fund a real solution to the funding woes of SMEs or just another political stunt?

Is the Australian Business Securitisation Fund a real solution to the funding woes of SMEs or just another political stunt?

The last piece of legislation passed before the previous Morrison Government went to the polls was the Australian Business Securitisation Fund (ABSF) Bill which makes $2b available to SME lenders over the next four years to kick start the development of a market for securitised SME loans.

Will the ABSF which is administered by the Federal Government’s Australian Office of Financial Management (AOFM) solve the funding gap or is it more of a political stunt? This article examines what the ABSF means for small business lenders and borrowers.

For those not fully familiar with how the Fund will work this diagram might be helpful:

ABSF image

Outside of the big four banks, which still control around 80 per cent of the SME lending market, there are dozens of alternative lenders looking to fill the widely talked about SME lending gap which some experts put at $80b. These lenders include fintechs, challenger banks, neobanks, specialist industry and product lenders plus a whole bunch of smaller shadow and sometimes shady operators. But very few of these lenders will get access to the fund with the AOFM indicating it will initially limit access to a “small number of transactions.”

So not a huge amount of money will be available to SMEs and only a small number of lenders will be able to access the fund. These might include car and plant and equipment financiers as well as debtor or invoice financiers. The AOFM will offer subsidies to those lenders that meet their criteria being:

Meet the AOFM’s guiding principles (published last week) which cover areas such as risk management, corporate governance, disclosure etc. These hurdles will not be easy to meet, especially for smaller and newer lenders.
Operate close to where the major banks are operating in terms of security provided and the industry.
Funds will not be made available to unsecured lenders, at least for the short to medium term. This end of the market seems to be regarded as too nascent and risky. The sub-scale nature of the unsecured lending sector, particularly amongst the fintechs, highlights a Catch 22 situation. Their growth is constrained by inability to access affordable capital yet they can’t access affordable capital because they are still relatively small.

The lenders that stand to benefit are those that have a good track record in terms of performance, internal systems and corporate governance and who operate close to banks.

It follows therefore that the SMEs that stand to benefit are those that are meeting or are close to meeting bank credit criteria including security and track record. But for SMEs that currently can’t get a look in with a bank, the ABSF is unlikely to improve access to funding, at least for the foreseeable future.

The Government’s Dilemma:

The Morrison Government and the AOFM cant afford to get this wrong. The history of government involvement in funding of small business is not good. It is both understandable and reasonable that the AOFM takes a cautious approach.

The ABSF is not intended to be a substitute for private sector investment in securitised SME loans. The AOFM’s mandate is primarily one of market development and the aim, over time, is to attract private sector investment such that at some point government intervention is no longer required.

Getting the balance right is the AOFM’s big challenge. Two areas stand out being:

1. The use of subsidies to encourage rather than discourage private investment in securitised SME loans. The AOFM aims to generate a return of not less than the Government Bond rate which gives it significant room to move in terms of the subsidies it can offer to encourage investment in securitised SME loans. But if the subsidies are seen to be excessive, they could in fact stifle rather than encourage private investment in these loans. Pricing for risk in SME lending is not easy, even for the most experienced lender.

2. Choosing lenders in a way that encourages not reduces competition. The AOFM is also mindful of a “Halo effect” where supporting a small number of lenders could damage the prospects of competitors who do not have access ABSF funds. There are obvious dangers if AOFM was seen as “picking winners” amongst SME lenders.
In the not too distant future the AOFM will call for proposals from SME lenders. It will be interesting to see how many and which lenders participate. Many, perhaps the majority, will sit back and wait to see how this unfolds. They may have reservations about their immediate ability to satisfy all of the guiding principles. They may also harbour reservations about providing the AOFM with data about their business including loan book size, historic arrears and loss rates, the range of interest rates charged and a breakdown of security types.

If the program proceeds well, the AOFM will become a treasure trove of data and this brings both opportunities and risks for all involved.

It is encouraging that the Government has finally recognised the need to give a leg up to alternative SME lenders in order to provide small business owners with better access to appropriate forms of funding. I have long held the view that the best way to improve competition in the Australian banking market is not endeavouring to get the big four banks to change their ways but rather to make it easier for new entrants to compete. This is a step in that direction.

It is understandable that the Government and the AOFM adopt a cautious approach when taxpayers money is used to support private enterprises. Over time, a well managed kick starting approach should lead to a fully fledged market for securitised SME loans which can only be a good thing for SMEs and the financial markets.

Comments and feedback are invited.

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