info@franchisefinance.market 1 300 30 20 71 BLOG

Blog

INFORMATION ASYMMETRY

SME lending does get prominence as an issue for FSI review and is acknowledged as an issue of significance, however, the conclusion and proposal are in essence:
Problem – the risks of SME lending are high mainly due to “information asymmetry” – that not enough information is readily available to banks on small businesses and small businesses don’t know enough about what records they need to keep to satisfy banks.
Possible Solutions:
Extend the Comprehensive Credit Reporting (CCR) regime now applying to consumers so as to include SMEs;
Create a national database to include tax returns, and as much other information as possible.
However, already the Council of Small Business of Australia (COSBOA), the closest thing to a representative association for SMEs, is praising the acknowledgement of the plight of SME lending in the report but stating that no solution can include more reporting and work from SMEs. The report tossed over the idea of a commercial provider of such a national database, as per Veda in the consumer space, but simultaneously acknowledged the difficult if not impossibility of such an arrangement because of the need to receive sensitive taxation and other government information, and commercial information suppliers will be reluctant to supply what might be commercially sensitive (i.e. potential litigious) information.
Likewise the limitation with the CCR concept has already been proven in the consumer space because since CCR became effective this year none of the majors have started to supply information to it, quite simply because supplying such information is arming their competitors so as to potentially steal their clients. Perhaps CCR might slowly improve in the consumer space, but I can’t see that being a quick process under the current voluntary basis. While the consumer side is rendered useless I cannot see them adopting this option for SMEs and if they do it will hit the same brick wall anyway.
Sadly, I can already predict that the FSI will heartily acknowledge the plight of SME funding but no practical recommendation will be made in this regard.
If there was a national database Elcano would of course utilise it, banks could utilise it to lower risk weighting for SME lending but nothing addresses the fact that ‘why should any of this induce them to increase SME lending’. The fact remains, and nothing in the Interim Report seems contrary, that mortgage lending and corporate lending are both lucrative enough that the hassle of SME lending and its relatively low profitability remain the detraction from SME lending.
There is no negative in this for Elcano as a big part of our ‘technology’ solution has to be to create algorithms pulling as much information as possible together to reduce the ‘information assymetry’. There is an example in the US where a business P2P lender is using information from social media in its loan assessment algorithms, such a stupendous advancement that it has recently given their fledging business and technology a multi-hundred million dollar valuation. It doesn’t even matter if there solution is fictional it shows that they are trying to do all they can to come up with a SME funding magic bullet.

COMMERCIAL FINANCE BROKERS

The only aspect of the recommendations I think likely to see the light of day is with regard to “increasing the number of commercial finance brokers so as to increase competition between SME lenders”. This is likely to be supported because of the “no skin off my nose principle”, i.e. might as well support and recommend it because it does not cost anything and politically it will appear as though we have attempted to do something to help SMEs.
The reality is different though. Just having extra independent brokers does not get around the following issues:
1. 70% of finance broker networks in Aust are owned by the banks;
2. Even those that aren’t owned by the banks just get a nice little list of providers they get familiar with and supply only their products (regardless the fact they promote many more);
3. Most importantly if there is little appetite to provide SME lending then just because there might be more brokers putting files to a lender doesn’t increase competition (if they don’t want to play the game there will never be much real competition if they happen to be standing on the field).
There are also several structural impediments to commercial lending specialist businesses:
1. Complexity – commercial transactions are far more complex and time consuming than simple mortgage lending;
2. Failure Rates – are much higher in the commercial lending space, inclusive of commercial clients screwing the broker by pulling out of the arrangement before completion;
3. Time – transactions have long lead times;
4. Trail income – most commercial transactions don’t pay trail income, which of course is where an advisory business gets most of its value from, thus difficult to build asset value to the owner.
An increase in commercial finance brokers will be beneficial to Elcano in the long-term and while I am sceptical it will have a short or mid-term effect on SME credit I am certain it will happen.

CROWD FUNDING

The Corporations and Markets Advisory Committee (CAMAC) had already recommended that specific legislation should be enacted so as to increase limits for direct capital raising for online crowd-funding platforms. This is mostly so as to bring Australia’s crowd-funding legislation in line with the international norm. I am sceptical of the need or the benefit of doing this.

SUPERANNUATION

In my opinion of most interest to Elcano were aspects and statements surrounding super.
In quoting, reasonably extensively, from the submission of RiceWarner FSI stated:
• “Older superannuants are also likely to prefer yield over capital appreciation.”
• “The increase in demand for products like lifetime annuities will increase the demand for and use of fixed income assets”
• “Consolidation in the superannuation market will be accompanied by a shift to more illiquid assets as the cash flows for large funds become larger and more predictable.”
The FSI itself states “The demand for fixed income products could also stimulate demand for securitised assets, which is an important funding source for smaller lenders. Further, superannuation funds could engage in direct lending to households and businesses in direct competition with the banking sector, which has already occurred in other economies, such as the United Kingdom. This would require superannuation funds to develop credit assessment capabilities and would have implications for how funds might be regulated.”

CONCLUSION

The very last statement in the paragraph above encapsulates the opportunity that our PEPSMEF platform is intended to benefit from by becoming the facilitator and the outsourced supplier of “credit assessment” tools and services.

Darren Lelliott

Your Turn To Talk

Leave a reply:

Your email address will not be published.

 
× Live Chat Support

We are currently offline. You can email us instead.