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Increasing the threshold for applying internal rating to boost SME lending?
The Australian government has kicked off an inquiry into the banking system. It will be chaired by David Murray the former CEO of Commonwealth Bank of Australia. A draft terms of reference has been released and a number of interested parties have commented on it.
The Commercial Asset Finance Brokers Association of Australia Limited (CAFBA) submission caught my eye as it had a specific suggestion to change the regulatory capital requirements for banks to make it easier to lend to SMEs. The CAFBA submission outlines a number of issues that potentially makes it harder for SMEs to borrow money.
APS 113 details the prudential requirements for banks who are accredited to use their internal models to calculate regulatory capital requirements. According to CAFBA, banks have more onerous requirements for loans in excess of $1m, and hence are reluctant to lend over this amount. CAFBA recommends lifting this threshold.
SME lending – a sweet spot?
I keep reading about how viable, high quality small medium enterprises (SMEs) find it difficult to secure debt financing from banks. An OECD study of SME sector lending conditions found that credit was still constrained following the GFC. This is covered in the press from time to time, for example, see this article in the Financial Times. The situation also seems to occur in Australia according to this article in the Sydney Morning Herald. If high quality SMEs struggle to get debt funding, then surely this is a sweet spot waiting to be exploited. A SME loan fund can exploit this demand. Australia’s burgeoning superannuation sector could participate.
Risk Return Sweet Spot 