Banks profit at business expense

The big four banks have increased their margins for domestic lending, according to new figures from the Reserve Bank. This is despite claims made by the banks that they will have to increase interest rates outside decisions made at RBA’s meetings.

The results have drawn criticism from the business community, with Dun & Bradstreet chief executive Christine Christian labeling the increases as “bad for small business”.

The figures, which were released yesterday in the RBA’s biannual financial stability review, found the difference between the big fours’ average cost of borrowing and lending has grown over the past 12 months from 2.11% to 2.24%.

The figures come after the banks said they would have to raise rates as much of their lending was in long-term deals, where most of the pressure has been placed as a result of the global financial crisis.

But conditions are beginning to ease, according to the RBA, and the banks are still slow in easing any interest rates for business lending.

While the official cash rate has fallen by 425 percentage points over the past year, and standard variable home loans have fallen by 3.81% since August 2008, interest rates for loans to SMEs have only fallen by 3%.

Christian says this needs to change and the current environment is unhealthy for businesses.

“Essentially what has happened is the lack of competition that has arisen from the financial crisis has driven out most of the second tier banks and other finance companies who were previously a significant source of funding for small business. So that leaves the four major banks in a good position to increase margins and negotiate more effectively on their own behalf.”

“The current environment is not good for small business, lack of competition is not good for small business and we need to have second tier lenders come back into the market along with international banks.”

Christian says having the banks lower their lending rates will result in more competition and better business conditions for all sizes of SMEs.

“This will create more businesses, get credit flowing, create more competition and we’ll see people taking more risks, more entrepreneurs coming back into the market, as opposed to now where we just have four major banks calling the shots.”