Banks and small business have a mutually-beneficial relationship — like oxpecker birds and the animals they sit on. (Flickr: RayMorris1)
Banks need small business. Small business needs banks.
Think of the oxpecker birds that sit on the backs of elephants and hippopotamuses.
They don’t just eat ticks and suck the wounds dry — they show even animals of vastly different size can be part of a mutually-beneficial relationship.
But there’s an unavoidable tension. If a hippo rolls, you might not be able to fly away.
That conflict between millions of small businesses and some of the biggest businesses in Australia — the banks — has been clearly exposed in the recent round of banking royal commission hearings in two key ways.
The first is the lack of diligence about checking business plans, when there’s a house available to secure the loan.
We saw something like this in the first hearings about mortgages.
Banks were very interested in your payslips and the money coming in to service the loan. Your expenses? Could scarcely care less.
According to evidence presented to the banking royal commission — between “Clip Art”-filled business plans and “fanciful” financial forecasts for franchises — once there’s a house, they don’t care about the plan.
But for many ambitious small business people, or the parents wishing to support them, that’s all they have.
Expect commissioner Kenneth Hayne to have a lot to say about this issue in his final report.
‘I saw him struggle’
The second conflict between small business and extraordinarily large banks is that they hold pretty much all the cards.
If you get into disagreement with your bank about the direction of a loan or a business, it will be very difficult to change their mind.
A parade of aggrieved small business owners — confused, angry and heartbroken — went through the witness box this week.
As the global financial crisis was crunching markets around the world, BankWest’s new owners Commonwealth Bank went through the books. They found a “tick and flick” culture of compliance to internal regimes, and a large exposure to certain businesses.
Out came the sledgehammer — $14 billion in exposure to business loans at the end of 2009 was pounded down to just over $10 billion in three-and-a-half years.
It caused pain.
Former Australian Federal Police officer Brendan Stanford detailed how his brother spiralled into depression.
Mr Stanford was asked: “What was the effect on your brother of the selling of the hotel?”
He couldn’t answer, welling with tears in silence until commissioner Hayne asked if he’d like a break and cleared the court for five minutes.
When we returned, Mr Stanford explained: “I saw him struggle … I saw him depressed for a few years. That’s why I’m here today, because he couldn’t come in.”
It was raw, real and relevant.
Mr Stanford was among a litany of former BankWest customers hit by unilateral rate rises, increased charges, written-down values and a tightening of the screws.
Some unfairness was clear and unfathomable — such as being forced to pay, within seven days, for a $10,000 forensic accountant’s report on their business, which they never requested or received.
Other issues were more complex — such as defaulting loans for “non-monetary” reasons.
It’s worth noting that in the closing submissions on Friday, the royal commission slapped BankWest for the unreasonable $10,000 report, but largely cleared them of the broader issue of rebalancing their loan exposure.
People are paying their loans, but issues in their broader industry, or other financial indicators (like debts to the Australian Tax Office) cause the bank to call in their debt.
This is clear from the case studies tendered.
When your small business loan is going south, in the opinion of the bank, you are unlikely to be told until long after they’ve made their decision.
Fighting it appears futile, and even if you win with the Financial Ombudsman Service, there’s no certainty it will be the end of the matter.
Half-time in the big game
We’ve finished the third set of public hearings. My perspective on the banking royal commission calendar is that there can likely be only six hearings before the draft report is due at the end of September.
The fourth, just announced, will be held in Brisbane and Darwin at the end of June and start of July.
It will examine issues for people in regional areas, farming finance, natural disaster insurance and how financial institutions interact with Indigenous Australians — particularly in remote areas.
Expect another hearing — likely focussed on Australia’s multi-trillion-dollar superannuation industry — at the start of August.
That leaves room for one more hearing before the report is due. But on what?
- Dispute resolution?
- The legal framework around banks?
- The overseas experience?
- Potential implications of the commission’s recommendations?
They’re all in the terms of reference that set the parameters of the commission.
Read them if you like, because your guess is as good as mine.