ANZ talks up non-monetary loan covenants for SMEs

  • By Elizabeth Fry

Australia New Zealand Banking Group chief executive Shayne Elliott said non-monetary loan covenants are important as they allow banks to have a conversation with SME customers when their business starts going off track.

At Tuesday's second public hearing into the conduct of Australia’s major banks in Canberra, Committee chairman David Coleman, referred back to the inquiry by the small business ombudsman which had found banks had been unfair in their dealings with SME's with loan contracts.

An inquiry into small business loans by ombudsman Kate Carnell recommended that this practice be abolished for loans under $5 million.

Elliott said ANZ does not impose non-monetary defaults or have covenants on loans below $1 million, and is reviewing them for loans of less than $3 million- but has yet to make a decision.

Pressed further on whether ANZ was planning to abolish these covenants for loans under $3 million, Elliott avoided answering the question directly taking the opportunity to explain how things worked.

Warning lights 

“There’s a very big difference between a default and a bank moving to repossess or wind up a company. A default is just really a trigger to sit down with a customer and understand what’s going to happen in the future.

“Essentially, when an SME borrows money they are pledging to us to run their business well and if they run their business well between certain guidelines - interest cover, loan-to-value ratios- we are more likely to give them money, give it to them for longer and more like to give it to them at a very attractive rate.

“But if things change and warnings lights go off, we think it’s right that we should have the opportunity to sit down with that customer and discuss ways out.”

Elliott pointed out that of the 116 SME customers that had gotten into difficulty with defaults, only three were for non-monetary reasons.

The reason ANZ took action in those cases, he went on to say, was the emergence of a second creditor that had taken action against the customer.

Higher risks 

But the chief executive stressed that covenants are important and without them small business will have "less access to credit and credit will be more expensive and shorter-term because the risk is higher."

But he qualified that by stressing that the clause is not widely used by the banks - it’s just an opportunity to have a conversation if things start going wrong.

This was clearly not the answer Coleman was looking for.

“What I am struggling with is that on the one hand you say banks rarely enforce these clauses but when Carnell recommends that banks get rid of them – as they cause immense distress to some of your customers- you say no.”

Said Elliott: It’s the different between using the clause to enforce action against the client which happens rarely and using the covenants to ensure a conversation with a customer. The earlier we can have those conversations with a business that is going off track, the more we can do and the more the customer can do to make sure the business survives.