Take up of TFF expected to ramp up, driving banks to lend

  • By Christine St Anne

While the take up of the Reserve Bank’s Term Funding Facility has been modest to date, the central bank expects banks to soon use this form of cheap funding, spurring banks to lend to small businesses. 

Speaking at the Kanga News Summit via a webinar, Reserve Bank assistant governor Chis Kent provided an overview of the RBA’s funding and liquidity approaches in the current health pandemic.

Kent highlighted that banks now have access to the cheapest sources of funding in part by the recent actions by the central bank. 

Kent also gave an update on the bank’s TFF initiative

The TFF was set up in March as the health pandemic unfolded with the aim of lowering borrowing costs and therefore support lending particularly to businesses. 

He highlighted that the TFF does this by providing a guaranteed source of funding to banks for three years at the low cost of 25 basis points, with an incentive to increase lending to businesses, especially small and medium-sized enterprises (SMEs). 

There has been debate around whether the TFF has to date achieved its aim in supporting lending to small businesses particularly with industry data to date suggesting that small businesses are not confident in taking up extra debt, a view expressed by the Australian Industry Group. 

At the same time, data by National Australia Bank has revealed that one in three new businesses report funding as their to challenge while these businesses also need greater access to a more diverse range [and cheaper] funding options. 

It was a concern tackled by Kent. 

“On the supply side, it certainly has helped reduce the cost of funding both directly and indirectly.” 

Much of that has been because of credit going out the door to larger businesses. Banks that have increased lending to small businesses have also received an allocation from TFF

In terms of encouraging an increase in the demand credit, Kent said the access to cheap funding should encourage banks to lend and believes that is already at play in the TFF numbers.  

Here he revealed that the initial allowance of $90 billion for the banks to use has now grown to $150 billion. 

“Much of that has been because of credit going out the door to larger businesses. Banks that have increased lending to small businesses have also received an allocation from TFF.”

But he did acknowledge the growth of credit will be underpinned by demand. 

Kent also highlighted the relatively sluggish take up of the TFF – currently around $26 billion, or around 17 per cent of the total funding currently on offer.

He provided an assessment of the slow uptake of this funding option, the most obvious one – that banks have had access to cheaper funding from other sources. 

“In particular, banks have been able to issue bank bills at rates below 25 basis points,” he said.

Bank deposits have also grown, and an increasing share of deposits have been paying rates below 25 basis points.

 Also, Kent noted, the TFF provides funding for three years from the date of the drawdown, so the longer a bank waits to draw funds, the later they will have to repay the money. 

“With no pressing funding need right now, and ample alternative short-term funding at low cost, delaying the drawdown is a useful option,” Kent said.

However, he expects banks will tap into the TFF closer to the end of September deadline.

“At that time, it will make sense for banks to compare the certain 25 basis point cost of the TFF with the uncertain cost of other sources of funding over the next three years, including bonds that would mature over that period. 

“So, our expectation and liaison with the banks suggest that the take-up of the TFF will ramp up as we get closer to the end of September.”