February 6, 2019

By Bob Coleman
Editor, C-Suite Wednesday

C-Suite Wednesday — The Diligent and Prudent Banker Small Business Lender Standard

Down Under bank, Suncorp, is under fire for aggressively collecting five outstanding small business loans to the family of an Australian entrepreneur who died unexpectedly.

The bank demanded the family sell the business to repay the debt.

“How stupid can you be?” said the son. “We got it a couple of days before Christmas and that just really tipped Mum over the edge. I just couldn’t believe it. Going through a royal commission, and they are still addressing mail to my dad who died over three years ago.”

The bank apologized.

The fallout over this and other incidents led Australia to seriously consider implementing new regulations on small business lenders — lenders that have been heavily criticized by government officials for not providing credit “even to high-quality small businesses.”

Australian lenders already operate under a “diligent and prudent banker” small business loan underwriting standard. In the event of a default, the bank must prove there is no “bank misconduct.” in determining if the small business can repay the loan.

Writes Karen Maley of the Financial Review:

This requirement is enshrined in the Code of Banking Practice – a voluntary code formulated by the bankers’ lobby group, the Australian Banking Association. Courts have held that the code forms part of the loan contract between the bank and its customers.

As Commissioner Hayne points out, there is huge uncertainty about what inquiries a diligent and prudent banker needs to make before making a small business loan, and forming an opinion about the customer’s ability to repay the loan.

Does the bank need to critically analyse the cash flow forecasts and the business plans that the small business submits? Or does it merely require the bank to satisfy itself that the borrower can repay the loan, and that there’s no glaring flaw in the business plan?

Not surprisingly, 20% of Australian small businesses say they don’t have access to capital.

Some of the proposed regulations mulled by the Royal Banking Commision:

  • Require lenders to conduct a feasibility study to ensure the small business can repay the loan
  • Placing restrictions on how lenders can liquidate collateral
  • Compel lenders to automatically extend loans when they mature
  • Extend consumer protection laws to small business borrowers

Facing industry backlash that the proposals would further constrict small business lending, on Monday the Commission refused to adopt the new rules and left current regulations in place.

In an unrelated move, the Commision established the definition of a small business is “turn” or annual revenues of $5 Million AUD ($3.5 million US) and up to 100 full time employees.