SME lending demand to remain muted for 12 months: East & Partners

Demand by small- and medium-sized business for lending will remain muted for most of 2012, with new figures showing that SMEs are increasingly eschewing borrowing in favour of saving.

Micro business with less than $5 million in annual revenue are now depositing $2.31 for every dollar they’re borrowing, according to banking research and advisory firm East & Partners.

For SMEs, companies between $5 and $20 million in annual revenue, it is $2.30 per dollar borrowed, East & Partners says.

By contrast, companies turning over between $20 and $530 million are depositing 90 cents for every dollar they are borrowing.

At the top end of town, that figure is 0.49, meaning companies are depositing 49 cents for every dollar they’re borrowing.

East & Partners says the growing level of deposit making among SMEs is a result of “continued aggressive marketing by banks, tight access to credit for the segment and a very depressed appetite for borrowing”.

“The focus is not necessarily one of growth for them,” Paul Dowling, principal analyst at East & Partners, says.

“It’s maintaining the market and protecting profit margin.”

Dowling says East & Partners believes that small business credit growth will remain muted.

“Our view is that it will stay flat-lined,” Dowling says. “SMEs will continue to slowly deleverage themselves, and that will be reflected in lending volumes.”

He expects credit growth of less than 1% through to the end of September 2012.

“There are always exceptions, but as a segment, SMEs are holding on and don’t plan on changing.”

“Small business has been in this mode for some time and the longer the behaviour remains, the more it becomes habitual.”

Dowling says although this habit of financial conservatism likely protects many businesses during the global economic turmoil, it does “unpleasant things to employment growth and innovation”.