The Australian Bankers' Association's response to the inquiry into small business loans has been slammed as a "feeble effort" by the small business ombudsman.
The Australian Small Business and Family Enterprise Ombudsman's inquiry was highly critical of banks calling in small business loans on the basis of non-monetary defaults.
On Friday ABA chief executive Anna Bligh said the banks would reduce 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," she said.
Devil is in the detail
But Ombudsman Kate Carnell says while the ABA says it is supporting small businesses, the details of its response mean lots of small businesses will not be covered.
"I'm really disappointed with their efforts to minimise the coverage of their recommendations," Carnell says. "They've put out something which indicates they support all of our recommendations but then have fundamentally changed the capacity of small business to access those recommendations by really, really restricting the definition."
The Ombudsman had called for small business loans to be defined as any loan under $5 million to a small business but the ABA defines a small business loan as under $3 million and excludes businesses with 20 or more employees or turnover of $10 million or more.
Carnell says this is a "very restrictive" definition.
"A business with more than 20 employees is still small, particularly at the time of wanting the loan," she says. "You might be wanting the loan during the tourist season and your business is in Queensland or at the time of year you are harvesting on your farm."
The ABA also limits its definition of small businesses to those with aggregate loans under $3 million including loans with all financial institutions and all associated entities.
Carnell says this is "unworkable".
"That really blows me away," she says. "Associated entities means partners, directors, or even if a husband and wife both have their own businesses they are associated entities. That really changes the game and really unfairly, I think it's just a method of reducing the coverage."
They've put out something which indicates they support all of our recommendations but then have fundamentally changed the capacity of small business to access those recommendations by really, really restricting the definition.
Kate Carnell
Carnell says the ABA's definition of a small business excludes a very large number of small businesses and "make a nonsense" of the ABA's claim that its response will cover 95 per cent of business customers.
Major banks move on loans
Carnell says the Commonwealth Bank's undertaking on Friday to remove contract terms that allow "non-monetary defaults" by small business customers who have borrowed up to $3 million from the lender was a better response than the ABA's "feeble effort".
"ABA tell me that what they have done is the lowest common denominator and banks can always go above," she says. "That's what I'd like I'd like to see, all banks go above that."
ANZ Banking Group will also remove "financial indicator covenants" for loans of less than $3 million but the bank has already fallen in line with the ABA with a spokesperson saying "the ABA definition [of a small business] was developed with the banks so therefore we will be adopting the ABA definition".
Financial indicator covenants will remain in place for small business customers seeking "complex lending or complex products".
National Australia Bank and Westpac Banking Corporation are also removing financial indicator covenants for loans of less than $3 million.
CBA and NAB's changes apply to new and existing customers, while ANZ and Westpac's only apply to new contracts or when customers seek to renew or vary an existing contract.
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