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RBA, government to provide lenders with billions for SMEs

by Annie Kane14 minute read
RBA, government to provide lenders with billions for SMEs

The central bank and federal government are establishing new multibillion-dollar initiatives to enable lenders to continue supporting Australian consumers and small businesses.

Government package

The federal government has said it will invest up to $15 billion to enable smaller lenders to continue lending to consumers and businesses.

The Australian Office of Financial Management (AOFM) will be provided with an investment capacity of $15 billion to invest in wholesale funding markets used by small authorised deposit-taking institutions (ADIs) and non-ADI lenders.


The $15-billion capacity would allow the AOFM to support a substantial volume of expected issuance by these lenders over a 12-month period.

Speaking of the new investment, Treasurer Josh Frydenberg commented: “The government’s actions will enable customers of smaller lenders to continue to access affordable credit as the world deals with the significant challenges presented by the spread of coronavirus.

“Small lenders are critical to Australia’s lending markets, often driving innovation and providing competition for larger lenders.”

He continued: “Importantly, the assets being purchased by the AOFM will not be limited to residential mortgage-backed securities. 

“The AOFM will also be able to invest in a range of other asset backed securities and warehouse facilities. 

“The government will provide the AOFM with investment guidelines that will outline the basis on which the AOFM is to undertake these investments.”

Enabling legislation will be introduced in the week commencing Monday, 23 March 2020. The AOFM is expected to be able to begin investing by April.

RBA term funding facility

This funding will complement the Reserve Bank of Australia’s (RBA’s) announcement of a $90-billion term funding facility (TFF) for ADIs that will also support lending to small and medium enterprises.

When announcing an emergency rate cut of 25 basis points (taking the cash rate to a new record low of 0.25 per cent), the RBA also released details of its new package to support the Australian economy through “this challenging period” of coronavirus. 

The TFF will offer three-year funding to banks at a fixed rate of 0.25 per cent, with particular support for credit to SMEs. 

The facility is available to ADIs that are members of the Reserve Bank Information and Transfer System (RITS) and Austraclear (the central securities depository used by the Reserve Bank in its domestic market operations). However, other ADIs can apply to become RITS members to enable them to participate.

Interest will accrue on the funding provided under the facility and will be due at maturity or when the usage of the facility is terminated.

ADIs will be able to start using the facility no later than 16 April 2020 and will be able to draw down their initial allowance until end September 2020. 

ADIs will be able to obtain initial funding of up to 3 per cent of their existing outstanding credit to Australian resident households and (non-related) businesses, measured as the average of the participant’s total credit in the three months ending 31 January 2020.

However, they will also have access to additional funding if they increase lending to business, especially to small and medium-sized businesses. 

This additional allowance is equal to the sum of the following:

  • one times the dollar increase in large business credit outstanding from the three months ending 31 January 2020 through to the three months ending 31 January 2021 (if there is a decline, then this is zero); 
  • five times the dollar increase in SME credit outstanding from the three months ending 31 January 2020 through to the three months ending 31 January 2021 (if there is a decline in SME Credit Outstanding, then this is zero).

Banks will be able to draw down their additional allowance until end March 2021.

Funding under the TFF will be extended by the Reserve Bank to ADIs under repurchase transactions (repo).

Revealing details of the facility, the RBA outlined that the TFF would help “reinforce the benefits to the economy of a lower cash rate, by reducing the funding costs of ADIs and in turn helping to reduce interest rates for borrowers”.

Particularly, the central bank hopes that the facility will “encourage ADIs to support businesses during a difficult period” as they will be able to access “additional low-cost funding if they expand their lending to businesses over the period ahead”.

The scheme encourages lending to all businesses, although the incentives are stronger for small and medium-sized enterprises (SMEs).

It will complement the reduction in funding costs from the Reserve Bank's target for three-year Australian government bond yields.

It is expected that further details regarding the legal and operational aspects of the scheme will be published before 16 April 2020. 

‘These measures will support jobs, incomes and businesses through this difficult period’

RBA governor Philip Lowe noted that “the coronavirus is first and foremost a public health issue, but it is also having a very major impact on the economy and the financial system”.

“The primary response to the virus is to manage the health of the population, but other arms of policy, including monetary and fiscal policy, play an important role in reducing the economic and financial disruption resulting from the virus.

“At some point, the virus will be contained and the Australian economy will recover. In the interim, a priority for the Reserve Bank is to support jobs, incomes and businesses, so that when the health crisis recedes, the country is well placed to recover strongly.” 

Speaking of the new package, Mr Lowe continued: “The various elements of this package reinforce one another and will help to lower funding costs across the economy and support the provision of credit, especially to small and medium-sized businesses.

“Australia’s financial system is resilient and well placed to deal with the effects of the coronavirus. The banking system is well capitalised and is in a strong liquidity position. Substantial financial buffers are available to be drawn down if required to support the economy. 

“The Reserve Bank is working closely with the other financial regulators and the Australian government to help ensure that Australia’s financial markets continue to operate effectively and that credit is available to households and businesses.”

He added: “Today’s policy package from the Reserve Bank complements the welcome fiscal response from governments in Australia. Together, these measures will support jobs, incomes and businesses through this difficult period and they will also assist the Australian economy in the recovery.”

Prime Minister Scott Morrison welcomed the RBA’s moves, saying they were “highly aligned, completely synchronized with the actions that we’re taking as a government – and that, increasingly, state and territory governments are also taking – to address the issues that we‘re finding in our economy”.

“Their [the RBA’s] actions of $90 billion to support credit within the financial sector in Australia, topped off by the additional 15 billion from the Commonwealth, means that this is a very significant injection to support Australians, to support our economy, to support business, to support jobs, as we all come across on this bridge to get to the other side. 

“We know that the Australian economy will be stronger, Australians will be healthier, and Australian life can return to what we knew it to be.”

[Related: RBA pulls emergency lever]

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