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Three business credit handbrakes to crack

07:38pm March 26 2019

Businesses cite regulation and red tape as one of their key challenges. (Getty)

On a recent trip to Brisbane, one of our business customers founded by five refugees who couldn’t speak English told how they arrived by separate boats and were put in detention. Eventually, they were released and started a small recycling business, which today generates $50 million in income and employs 50 Australians. 

One of the founders was a man who talked of his family with pride. He was shy, but full of drive -- a perfect example of how business can help solve our biggest economic and social issues.

But the nation has a problem: Australian businesses, overall, are not faring as well as they could be. 

They’ve stopped investing in themselves, with business credit growth sinking to the lowest level in recent memory. In our small business book, credit growth has gone from being two times higher than large businesses for much of the past three years to around flat today. 

Larger businesses are not fairing much better with little credit growth once you strip out mergers and acquisitions activity, and infrastructure spending.

This investment strike is a problem: Australia can’t succeed in this environment in the long term.

So what’s the cause?

Some commentators point to the global environment, slowing Chinese economy or Brexit. But China’s growth, even at around 6 per cent, remains a tailwind and Brexit’s impact on the UK doesn’t affect Australia much. 

Also, the Australian economy is fine. Population growth remains one of the fastest in the developed world, unemployment is low at around 5 per cent, the RBA cash rate of 1.5 per cent has never been lower and is expected to fall further, and China’s demand for our exports remains strong. 

Sure, falling house prices is impacting credit growth, particularly from small businesses where we are seeing a “small business wealth effect” impact given most SME lending in Australia is property secured. 

For example, if you have a house worth $1 million in 2017 and thought it would soon be worth $1.2m, then a $500,000 business loan seemed reasonable. But in 2019, the house may be worth $900,000 and possibly moving lower, so that same investment loan could seem less reasonable. 

But digging deeper, the power structure in Australia that businesses rely on, including government, regulators and banks, is letting them down. 

As I see it, there’s three main issues: mortgage regulation, business regulation and red tape, and high policy uncertainty. 

National dwelling values have fallen 6.8 per cent from the October 2017 peak, according to CoreLogic, with larger declines in Sydney and Melbourne. (Getty)

Firstly, on mortgage regulation. 

Small business customers tell me they don’t feel banks want to lend to them, sentiments backed up by the Australian Small Business and Family Enterprise Ombudsman and conversations with bankers in every state. But the banks deny it and say they want to lend, including Westpac – and it’s true.

The answer to what’s going on lies in micro prudential regulation combined with human fear. 

Whereas macro prudential regulation in the mortgage market has been widely reported, such as the 10 per cent cap on investor lending growth, micro prudential regulation is less well known. It includes formulaic serviceability tests and stringent documentation requirements, which worked to help stabilise the housing market after its multi-year boom, particularly in Sydney and Melbourne, and allow the broader economy to get the benefit of the low cash rate.

But small businesses have been caught by these micro prudential changes. It’s a textbook case of “unintended consequences”. For example, we only use current income and expenses, not future cashflows, which is a problem for businesses which borrow to make investments that will grow and improve their cash flows. 

There are good businesses we can’t back and I’ve seen instances where borrowing capacity has reduced 20-30 per cent.

Making things worse is bank fear, specifically the thousands of human beings trying to do their jobs, but scared of making a mistake. If a small business owner forgets to include their Foxtel bill or credit card for their daughter, the banker is scared of the consequences. So we have more manual checks, more onerous forms, and more reporting.

We, the banks, are to blame for that and we need to work with regulators to fix the impact of micro prudential mortgage regulation on broader credit growth. Risk aversion is human, but not the right answer.

Second, we need to finally have a mature discussion about regulation and red tape. The sheer amount is affecting all business – not anything specific but the cumulative impact and the pace of change.

Australia has over half a million pages of business regulation. If you could find it all in one place, which you can’t, it would take over six years to read.

Some funny examples I’ve heard include how in WA you can’t buy or sell over 50 kilograms of potatoes unless you are a member of the Potato Corporation and Queensland taxi cabs being required to carry a bale of hay in the trunk. But there are serious ones too, customers frustrated by different state approaches and processes across payroll tax, workers compensation, fair trading laws, and definitions of ‘small business’ or ‘employee’.

This is on top of the existing national regulation on OHS, hiring, firing, penalty rates – there are currently 122 penalty rates. The list goes on.

We are drowning our businesses in regulation and Australia is falling behind globally.

Lastly, policy uncertainty is incredibly high. 

Customers are saying they’re reluctant to invest in the current political environment and can you blame them given the decline in certainty about the ensuing return?

That’s not to blame individual politicians, but we’ve had a leadership spill in government a year before an election, months of uncertainty around which party will be in government and various policy positions. Election uncertainty is to be expected, but once Australia decides, it’s essential that business has greater certainty to invest.

Look at the US – while there is much to disagree with about the US President, he is incredibly pro-business and it’s helping. GDP is rising at 3 per cent, unemployment is below 4 per cent and wage growth (such an important topic in Australia), is around 3 per cent. 

When governments are pro-business, businesses respond and hire that extra person or buy new equipment. 

In Australia, too often we are talking down our businesses, rather than up.

We sometimes denigrate profit as something inherently immoral. We often reduce the value of business contribution to solving our most important economic and social problems. We can paint business success as a counter to social benefit, and we like to glorify small business, while vilifying larger ones.

That is not to say I am blind to how businesses can – and do – go wrong. Or naive to how sophisticated businesses can sometimes take advantage of unsophisticated or vulnerable customers. Or to how businesses can make profit through lack of transparency. Or even how human error can lead to the very human suffering of customers.

Business needs to change to adjust to changed community standards and growing anger across the world. 

But business success is all our success – Australia cannot succeed without businesses also succeeding and helping solve our biggest problems, whether that’s low wages growth or skills acquisition in a changing economy. 

Let’s be pro-business and pro-worker and continue our 28 years of growth.

David was appointed Chief Executive, Consumer in April 2019, responsible for all consumer distribution, digital, marketing, banking and insurance products and services under the Westpac, St.George, BankSA, Bank of Melbourne, BT, and RAMS brands. Prior to this, David was Chief Executive, Business Bank from June 2015, after three years as Chief Product Officer for the Group’s retail and business products, as well as overseeing the Group’s digital activities. Before joining Westpac in 2012, David was Executive General Manager, Cards, Payments & Retail Strategy at the Commonwealth Bank of Australia. David was also formerly Managing Director, Strategy, Marketing & Customer Segmentation at Australia and New Zealand Banking Group Limited and Vice President and Head of Australia for First Manhattan.

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