Big banks put squeeze on small business

BANKS are squeezing small-business customers with higher fees and fatter margins, the Reserve Bank says, while competition between lenders has fallen.Small business bank fees rose even faster last year than this decade's average annual rise of 7 per cent, the RBA said in a submission to a federal inquiry into small businesses' access to credit.Small businesses, which depend heavily on major lenders for credit, had also seen spreads on their loans increase more than those on home loans, the central bank said.The trend occurred amid dwindling competition, as banks took a more cautious approach to lending.The big banks' share of small-business lending has jumped to 75 per cent, from under 65 per cent before the financial crisis, after several acquisitions among lenders."Competition in the small-business lending market has eased from the strong levels just prior to the onset of the financial crisis, but should recover as the economy continues to strengthen," the RBA submission said.Small-business borrowers have historically paid higher interest rates than home buyers because of their higher risk profile, but the Reserve said this gap had widened in the crisis.Interest rates on residentially secured business loans were 80 basis points above "low-doc" housing loans, compared with a gap of 30 basis points before the crisis, the RBA said.Bank fees from business lending were worth $6.7 billion in 2008, though the RBA said this was a minor cost for business compared with their interest bill. The key reason for the squeeze €” which has tightened access to credit without crippling borrowers €” was the rising risk of small-business loans going bad."The greater increase in business rates than housing rates, in large part, reflects a reassessment of risk margins on business lending in light of the difficult economic and financial conditions over the past couple of years," the RBA said.Despite the tougher conditions facing small-business borrowers, the RBA said most were able to access the credit they needed. Further, the heavy cuts to official interest rates had more than offset the higher fees and increased margins the banks were taking on small-business loans.A deputy governor of the RBA, Philip Lowe, yesterday said large businesses tended to be more optimistic than small businesses. But this division was not as marked as in the US. "Conditions are tight, but unlike in the US, small business still do have access to credit," Mr Lowe said.