National Australia Bank has put forward a compromise in the debate over which firms should be treated as small business banking customers, a move that could pressure other banks to follow suit.
Small business advocates on Friday backed NAB’s move to extend protections to customers with total debts of up to $5 million, up from $3 million today, in response to the Hayne royal commission into financial misconduct.
Currently, banks treat any firm with total debt of up to $3 million as a small business, but the commission said this should change to “any business or group employing fewer than 100 full-time equivalent employees, where the loan applied for is less than $5 million”.
The definition is important because it gives borrowers extra protections in their loan contracts, whereas from the banks’ perspective, these loans are seen as riskier.
NAB, the country’s biggest small business lender, on Friday said it would treat firms borrowing up to $5 million as small businesses. But it did not go as far as the commission’s recommendation, which would entitle businesses taking out multiple loans of less than $5 million to small business protections.
NAB’s big rivals are yet to offer a similar change. Westpac and Commonwealth Bank last week said they would work with the Australian Banking Association (ABA) on the proposal, while ANZ’s initial response to the royal commission did not directly address the issue.
The issue is particularly sensitive for second-tier banks, which are more exposed to adopting a wider definition.
Small business groups have argued for a higher threshold on the basis that many small firms, including farms, borrow between $3 million and $5 million, but miss out on protections.
Small business and family enterprise ombudsman Kate Carnell said she still supported commissioner Kenneth Hayne’s proposal, but welcomed NAB’s move as a “reasonable compromise” and said she would pressure other banks to follow suit.
“NAB moving does not change the code,” Ms Carnell said. “It was important that somebody take the lead on this and we did not continue to get the push-back that we had.”
Ms Carnell said she “did not accept” that the regional banks, which claim to be most affected by the proposed change, would stop lending as a result.
Council of Small Business Organisations Australia chief executive Peter Strong welcomed the NAB move and said it would continue talking to the ABA to ensure the eventual outcome didn’t have a negative impact on access to finance.
ABA chief executive Anna Bligh said the body was still finalising its position, but highlighted figures showing commissioner Hayne’s proposal would have a greater effect on smaller banks.
“The current code definition of $3 million total credit exposure was reached after considerable evidence-based consideration about the likely impact on availability of credit and competition in the market,” she said.