Implications for SMEs from the Banking Royal Commission

There are a number of findings and recommendations from the Banking Royal Commission that will have a significant impact on the SME sector, and the implications could take some time to fully play out.

The final report, released in February, contained a list of recommendations designed to break the cycle of appalling behaviour in the banking sector.

Access to credit

While the commission revealed some less than ideal practises amongst Australia’s largest banks to their small business clients, there is also considerable concern about the credit implications for the SME sector, given access to finance had already been an issue in the lead-up to and during the hearings.

Unless the banking sector as a whole comes to the realisation that its primary purpose is to provide access to credit in a responsible manner, access to credit is likely to remain an issue.

It may well mean that SMEs will need to access finance from alternative sources, such as shadow lenders, with terms and conditions different to those traditionally offered by the banks. This may have implications in terms of covenant reporting and funding costs.

SMEs are advised to carefully assess and consider what impact this will have on their business at the outset of the application process. For some owners, it may also translate to considering alternate succession plans (i.e. bringing forward exit and/or sell down strategies).

Lending

Another relevant recommendation was the expansion of SME lending under the new industry code, which is scheduled take effect from 1 July, to firms with less than 100 full-time equivalent employees, where loans are less than $5 million.

Code provisions

The report from the Banking Royal Commission also recommended granting new powers to ASIC to police the “enforceable code provisions” in the 2019 Banking Code, therefore elevating breaches of certain code provisions to breaches of law.

Corporate ethics

The report from the Banking Royal Commission touched on the importance of having sound and appropriate corporate governance in place, and for Board of Directors to do what is right rather than focussing on what it is legally required to do. This is an important distinction in business and should not be under-estimated in terms of its impact.