Ombudsman clarifies new securitisation fund following ‘confusion’

In a joint statement last month, Treasurer Josh Frydenberg and the Minister for Small and Family Business, Skills and Vocational Education, Michaelia Cash, announced that the Australian Business Securitisation Fund (ABSF) would “significantly enhance” the ability for small businesses to access funds by providing “significant additional funding to smaller banks and non-bank lenders to on-lend to small businesses on more competitive terms”.

However, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has clarified that the fund is for small business lenders, not SMEs themselves, after noting that there had been “much confusion and misinformation” around how the fund would work.

The ombudsman’s office echoed comments from the Reserve Bank of Australia that competition has been “less rigorous” for small business lending and that interest rates on small business loans have remained relatively high over recent years.

“The lack of competitive pressure is evident in the share of lending provided to small business by the major banks, over 80 per cent,” the ASBFEO said.

“This compares with a share of two-thirds for large business lending.”

Given that the Productivity Commission’s review into competition in the financial system found that the cost of sourcing funds is “the single largest expense for all lenders in the Australian financial system” and, therefore, a key influence on institutions’ ability to compete in the market for lending (or to increase profits), the ASBFEO said: “It is recognised that with this higher cost to source funds, the focus of lending has shifted to residential property as it is relatively more profitable.

“As a result, SMEs are unable to access capital when they need it or, if they can, it will be at a cost that is not sustainable.”

The Australian Small Business and Family Enterprise Ombudsman office continued: “While the exact structure is yet to be finalised, a securitisation product allows lenders to move loans off their balance sheet.

“A lender can package its performing loans to SMEs, say for a total of $10 million, which the securitisation fund will then buy for a cost, providing the lender with $10 million of capital.

“The cost to securitise is expected to be in line with the costs paid by the majors to source their funds from investors and depositors.”

It continued: “To be clear, the securitisation fund is not the business growth fund. The business growth fund will have a separate and different purpose – long-term equity funding. It will be funded by investors from the private sector, not the government. However, the government will facilitate discussions with potential investors and stakeholders.”

The ASBFEO reiterated that the fund would not provide loans directly to Australian SMEs but instead “offer wholesale funding to smaller lenders at interest rates comparable to those available to the major banks”.

“It will not mean that riskier small businesses will get access to more bank funding. The fund increases the capital pool available to the smaller lenders; smaller lenders will continue to apply their assessment process before approving a loan.”

The release continued: “The fund aims to boost competition outside the major banks by increasing the supply of affordable capital for smaller lenders to build their pool of capital and provide more lending products to the SME market.

“The fund is the first step in levelling the playing field between our entrenched major banks and smaller lenders that can offer tailored solutions to SME borrowers.”

[Related: Government launches $2bn fund for SME lenders]