The small business ombudsman argued that APRA needs to better support new entrants into the banking industry, in order to stimulate competition in business lending.
In a recent submission to the Special Senate Committee on Australia as a Technology and Financial Center, Bruce Billson, Australia’s ombudsman for small and family businesses, reflected on the business lending market.
He noted that the Reserve Bank of Australia has recognized that small businesses have struggled to access finance for years, those that often do to get loans against residential properties.
But “many business owners may not be in a good position to provide enough home equity to secure a suitable loan,” the RBA said.
According to the ombudsman, the challenge for small businesses is further exacerbated by the tight competition in the lending industry.
âHistorically high barriers to entry into the banking industry have limited competition. Small businesses and family businesses often find it difficult to access adequate finance to grow their businesses, especially without offering their family home as collateral, âMr. Billson wrote in another submission, to a recent review of the APRA.
âIt facilitated a traditional banking business model focused on home loans rather than small business loans. “
Judo Bank Co-Founder and CEO Joseph Healy made a similar observation when comparing business loans to mortgages recently, during his appearance before a parliamentary committee.
âIn the SME economy, there is a lack of competition. It’s a complicated segment of the economy to bank, it requires a very different skill setâ¦ so I would ask what kind of competition [are we looking for]? âMr. Healy told the House of Representatives Standing Committee on Economics.
âHow many banks are disrupting, or are capable of disrupting, the status quo? I think that’s where the focus should be, rather than the quantum.
In March, APRA said he was considering imposing stricter requirements for banking licenses, according to Xinja exit and the sale of 86,400. The review also included an industry consultation.
Mr Billson’s submission had listed suggestions for boosting small business lending, including revisiting how APRA’s limits for Restricted Authorized Depository Institutions (RADIs) “maintain a single pattern” and could be more nuanced.
âTo generate effective competition in the banking industry and support small businesses’ access to finance, the tiered licensing approach must accommodate a variety of product offerings,â Mr. Billson wrote.
âWe encourage APRA to take a flexible approach to minimum cash holding thresholds, derived from the entity’s size, business model and exit strategy. “
The mediator also criticized the two-year limit of the RADI license, during which banks can carry out a limited range of activities while building their capacities and resources.
If a license holder is unable to comply with APRA’s full prudential framework and start large-scale banking business within the two-year time frame, they must exit the industry.
Timing is a “concern,” Billson said, with APRA required to authorize RADI license extensions in the event that there is an unforeseeable delay in a bank’s progress to full ADI status. .
“The strict deadline described would deter potential investors if the new entrant nears the end of the two-year period, thereby limiting access to capital and ultimately causing an exit from the licensing process,” he wrote.
âSetting a two-year limit also creates challenges for these new entrants to raise capital quickly, build a reputation (while only accepting deposits from staff, family and friends), access wholesale funding market and forecast accurately. “
In addition, he noted that RADIs were limited to offering their deposit products to certain customers, staff, family and friends.
“Deposit limits and restrictions on customer types are influencing new entrants towards business models offering consumer-driven retail products, creating new challenges for small businesses with limited ADI lender options,” Mr Billson wrote.
âAPRA’s oversight and capital requirements should be sufficient to ensure the return of deposits should it become necessary, not limited to staff, friends and family. “
If APRA wishes to exercise caution, he added, the regulator could consider restricting products to retail and corporate clients who are financially aware of the risks associated with new banks.
The mediator also requested additional guidance for new entrants regarding APRA’s oversight approach.
Recently, Alex Bank became one of two restricted ADIs in Australia, APRA granting him a license at the beginning of the month.
He followed APRA extension of the RADI license of the challenger bank In1bank in June, due to the circumstances of COVID-19 being “beyond its control”.
Previously, the neobank Volt was the first to receive a RADI license, in 2018, but has now obtained a full banking license.
[Related: NSW releases COVID-19 support for SMEs and individuals]
Sarah Simpkins is the managing editor of Mortgage Business and The Adviser.
Previously, she reported on banking, financial services and wealth management for InvestorDaily and ifa.