Capping the rate on Coronavirus SME loans makes no sense at all.

The Government will cap the rate of interest lenders can charge on loans under the Coronavirus SME Guarantee Scheme (SMEG) noting that the move “will prevent interest rate gouging”. Talk about throwing the baby out with the bath water!

SMEG has been ineffective in allowing quick access to funding for small businesses that don’t have a residence they can offer as security. It has been in place for 5 months and of the $40b available, only $1.7b has been lent.

Imposing a cap of around 10 per cent will make it even harder for many of these potential borrowers.

The cap is based on the BBSY rate (approx. 0.15 per cent) plus a maximum margin of 10 per cent. So no SMEG loan will be able to be made at a current rate higher than around 10.15%.

Imposing a cap won’t help get more money into the hands of more small businesses for two simple reasons:

1. It won’t encourage banks to lend more and

2. It locks out non-banks because they can’t make a profit lending at 10 per cent.

The Banks. Around 18,000 businesses have taken out SMEG loans at an average loan size of $96k. While 18,000 is not an insignificant number, it is tiny in terms of the total number of small business borrowers.

The banks are reluctant to lend to small businesses unless they have an excellent proposition which can be backed by residential security. The way banks are structured makes it difficult for them to make a profit from unsecured small business loans. But even though SMEG now allows lenders to take security this does not include residential property.

The Government has made other changes to SMEG including increasing the term from three to five years and the amount from $250k to $1m. This could potentially help more medium sized businesses but it is the smaller ones that will still miss out and these are the ones who generally have to pay more to get credit.

Non-banks. These lenders typically are willing to take on higher risk businesses and many of them such as the fintechs tend to lend on an unsecured basis. Non-bank lenders are at a massive disadvantage as their cost of capital is way above the banks so imposing a cap around 10 per cent will simply lock them out of access to SMEG.

As an indication, banks can access funding under the Government’s Term Funding Facility at 0.25 per cent. Meanwhile many people and businesses have cashed up and placed their money in the bank for safekeeping despite the interest rates being close to zero.

CBA has written 50 per cent of SMEG loans to date and is currently advertising these loans at 4.5 per cent. This is below the cost of capital of non-bank lenders. Prospa, the largest and only listed online small business lender, has a cost of capital of around 7 per cent. Others would be a lot more than that.

So we have this mystifying situation where the banks that could do more are not inclined to do so and the other group that wants to play in this market is being locked out by the imposition of a cap.

This is the price of preventing “gouging”?

Here’s a few questions for the Government:

1. Won’t locking non-banks out of the SMEG scheme through the imposition of this cap just cement the dominance of the banks and stymie the growth of non-bank lenders?
2. If we want more competition in small business finance, why keep giving banks access to cheap funds and not do the same for non-bank lenders?
3. How will imposing a cap encourage banks to lend more when they can already offer rates well below the cap?
4. Why not allow the market forces to set the price of a small business loan and leave it to ASIC and AFCA to do their job to stop any gouging. Other parties like industry associations and Kate Carnell also have a vested interest in this.

The decision to impose this cap smacks of grandstanding and begs the question “Is it possible the Government is more concerned about minimising the extent to which its guarantee will be called on rather than actually helping small businesses access affordable and market priced finance?”

If you would like to engage in this discussion, please feel free to provide your feedback.


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