Banks respond to small business lending recommendations

The Australian Bankers’ Association has released its response to the Australian Small Business and Family Enterprise Ombudsman’s report into small business lending.

The ABA supports the Ombudsman’s 12 recommendations with one qualification related to the Ombudsman’s Recommendation 3 prohibiting non-monetary default.

The Ombudsman’s Recommendation 3 was that for all small business loans below $5 million, where a small business has complied with the loan payments requirements and has acted lawfully, the bank must not default a loan for any reason. Any conditions must be removed where banks can unilaterally value existing security assets during the life of a loan or invoke financial covenants or catch-all ‘material adverse change’ clauses.

The ABA argues a business is not a small business if it employs more than 20 people (100 if  manufacturing goods), the turnover is more than $10 million or the total credit exposure is over $3 million.

The ABA said “There will be a reduction in the number of specific events that could result in enforcing a loan. This means banks will no longer be able to call in a loan when small businesses are acting lawfully and making their payments on time, other than in exceptional circumstances.

“For new or renewed contracts, banks will expand the definition of small business beyond what is required by law so that ‘covenant light’ contracts apply to businesses with total loans under $3 million. This will be done by no later than the end of 2017.

“Banks will also give more notice to customers of changes to loan conditions and decisions on rollover.”

“Nine of the eleven Ombudsman’s recommendations for banks are consistent with the findings of the independent review of the Code of Banking Practice, and these new obligations will form part of the revised Code”.

The Commonwealth Bank has announced that ” For almost all of our small business loans, financial indicator covenants will no longer be included in loan contracts and therefore will no longer be a possible cause of default.
“Even though we very rarely used these covenants as a reason to foreclose a loan, this means that we will be removing all references to them in our small business loan contracts where our exposure to the customer is below a value of $3 million. We are doing this for all new and existing qualifying customers to provide greater transparency and certainty for small business.”
“Existing customers will be advised of the removal of these covenants to their loan contracts while future loan contracts will be simplified to make it easier for new customers to understand the loan contract.”

The ANZ Bank has announced that “As a result there will be no financial indicator covenants, such as loan-to-value ratios, for more than 95 per cent of ANZ small business customers. Financial indicator covenants will remain in place for small business customers seeking complex lending or complex products.
“We are simplifying the contracts for our small business customers to make it easier for them to understand their loan terms, so they can be clear up front about their obligations for the life of their loan. We are working to implement all these changes by the end of the year…The new, simplified standard loan contracts for small business customers will remove general material adverse change default clauses.
They will also clearly outline the reduced number of specific event clauses that could result in bank enforcement action if breached, including unlawful behaviour, insolvency, misrepresentation, change in beneficial control of the company, loss of licence to conduct business, and failure after a reasonable period to provide proper accounts.”

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