On Friday, the Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, released her Inquiry Report on the lending practices of the big banks when engaging with SME clients. And judging by the detailed list of recommendations provided in the Report, the current lending practices are not up to scratch.
All 25 members of the Australian Banking Association were surveyed, with the Big Four and another six banking organisations providing a response. In a nutshell, the Report found that banks are not straight-up with SME clients about their loan agreements. For starters, they aren’t written in plain English, in some instances valuation reports are not provided to the client, there are mixed signals about the loan from bank sales staff and credit risk staff, there are unrealistic loan milestones enforced. And the list goes on.
From the evidence tendered during the Inquiry, out of all of the case studies reviewed, it was found that:
- One third of cases involved bad business decisions where the banks acted reasonably
- One third of cases were a combination of poor banking practices mixed with bad business decisions
- One third of cases involved ‘unacceptable and possibly unconscionable conduct’ by the banks.
To be fully briefed on the issues at hand, Kate Carnell conducted hearings with the Big Four and delved into their business operations and client engagement policies. And the results stemming from the hearings were eye-opening. For example, only two banks out of the Big Four would support providing a two page summary detailing the prospective loan agreement to their SME clients. Further, the inquiry learned that it was not unusual for banks to default on loans, even when SMEs have kept up with their payments. If that’s not worrying, I don’t know what is.
Kate Carnell has provided 15 recommendations in the Report, 11 aimed at the banks and four directed at the Federal Government, making it clear that reforms are needed to ensure SME consumers are protected from power imbalances in the banking sector. I can only imagine being an SME client trying to understand the T&Cs of a contract and not being provided with proper advice on my responsibilities under the loan. As it states in the Report, lending practices of the big banks need to be more uniform and SME-friendly. Such findings would come as no surprise to SMEs.
The Report concludes that for reform to be successful in the banking sector with regard to SME lending, the big banks need to be receptive to making changes to their policies so that SMEs are not at a disadvantage when securing a loan. There needs to be transparency between financial providers and potential borrowers and that’s a no-brainer (well, to us anyway).
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