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Quarter of SMEs risk shutdown without support

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Malavika Santhebennur 7 minute read

A quarter of small businesses that are currently receiving income support would shut down if this support was removed before conditions improve, according to the central bank.

In its Financial Stability Review, the Reserve Bank of Australia (RBA) also said business failures are expected to increase, but added that there is a high level of uncertainty about the extent and timing of failures.

“It will depend on the strength of the economic recovery, which will be influenced by the duration and severity of future COVID-19-related disruptions, and the timing and extent of the unwinding of the various support measures,” the RBA said.

“Bankruptcies and insolvencies are currently very low because of the income support, loan repayment deferrals and temporary insolvency relief.”


The RBA said that despite fiscal policy support such as the Coronavirus SME Guarantee Scheme to shelter businesses from the economic ramifications of COVID-19, some businesses are facing more challenging circumstances.

“The capacity to service debt appears to have fallen in recent years for companies least able to pay,” it said.

The RBA further stated that at least 10 to 15 per cent of small businesses in industries most impacted by the coronavirus pandemic still do not have sufficient cash on hand to meet their monthly expenses.

“These businesses are in a tenuous position and are particularly vulnerable to a further deterioration in trading conditions or the removal of support measures,” it said.

On the other hand, business cash buffers have risen considerably since the beginning of the year, according to the RBA.


It said that before the pandemic, around half of Australian businesses had enough cash to pay their expenses for less than one month, but by June 2020, more than 40 per cent of businesses reported that they had enough savings to cover their expenses for more than six months.

The RBA partly attributed this to the level of income support, adding that large corporates are in a particularly comfortable position in terms of cash buffers.

They have increased their cash holdings considerably during the pandemic, including by reducing expenses and drawing down credit lines, the review stated.

“The majority of businesses are well placed to service their debts given the extent of income support, as well as low levels of gearing and falls in interest rates over recent years,” the RBA said.

“Fiscal measures that allow companies making losses up to June 2022 to claim back taxes paid in years up to June 2019 will further support cash flow for many businesses.”

According to data from the Commonwealth Bank of Australia (CBA) on COVID-19 temporary loan repayment deferrals for September 2020, the total number of home and small-to-medium enterprises (SME) loan repayment deferrals stood at 129,000, down from 174,000 in August and 210,000 in June.

Loan balances on these deferrals totalled $42 billion, down from $59 billion in August and $67 billion in June.

New approved or extended deferrals totalled $8.4 billion in September, with $7.9 billion of these an extension of an existing deferral.

There has been a monthly net reduction in deferred SME loan facilities of 23,000, and a monthly net reduction in deferred balances of $8 billion.

Expired or exited deferrals totalled 25,100 in September and equalled a balance of $9.2 billion, driven by the roll-off of auto-deferred business loans.

Out of the total deferrals, 1,400 have been granted an extension of their deferral arrangement for a period of up to four months.

Around 31,000 SME loans remain in deferral as at end September, representing a balance of $4 billion.

Of these, 28,000 loans worth $2.8 billion are due to expire and exit in October, subject to possible extension.

Online SME lender OnDeck Australia has recorded a 35 per cent increase in loan applications between August and September, which it said indicates improved confidence in the SME sector and increased demand for commercial funding.

Commenting on the finding, OnDeck Australia CEO Cameron Poolman said: “Along with the upcoming holiday period, we are also seeing SMEs keen to take advantage of super-sized instant asset write-off announced in the 2020-21 federal budget to improve productivity or expand capacity.”

The findings have come amid the Australian Taxation Office revealing that the cash flow boost scheme will be immediately cut off once businesses lodge their September monthly or quarterly activity statements.

Home loan deferrals

According to RBA’s review, repayments were deferred on around 7 per cent of housing loans by number at the end of August 2020, which is down from a peak of 8 per cent in June, and partly reflective of the recovery in many parts of Australia.

“Bank liaison suggests that some borrowers deferred repayments for precautionary reasons,” the review said.

Data from the Australian Prudential Regulation Authority (APRA) showed that around one in 10 loans recorded full repayments while deferred.

“This may understate the share of borrowers who have not changed the amount they are putting toward their mortgage to the extent that it does not include payments into offset accounts,” the RBA said.

Deferral rates have been the highest among borrowers working in industries most affected by the pandemic such as tourism and retail trade, and the shares of deferral loans have been slightly higher in Victoria due to the extended lockdown measures.

CBA figures revealed that there has been a monthly net reduction in deferred home loan facilities of 21,000, or $8 billion.

There were 40,200 expired or exited deferrals in September, representing balances of $15.9 billion. Of these, 17,300 have been granted an extension of their deferral arrangement for a period of four months.

Victoria accounted for 43 per cent of all deferral extensions, the largest of any state.

Around 93,000 home loans remained in deferral as at end September, with balances totalling $37 billion.

Of these, 52,000 home loans worth $20 billion are due to expire and exit in October, subject to possible extension.

[Related: 8.5 per cent of loans still have deferrals]

Quarter of SMEs risk shutdown without support
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Malavika Santhebennur

Malavika Santhebennur

Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.

Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.


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