November 13, 2018 / 11:36 PM / 6 months ago

Australia to buy $1.4 billion in non-bank debt to help fund small business

SYDNEY, Nov 14 (Reuters) - The Australian government will buy up to A$2 billion ($1.44 billion) in small businesses loans from non-bank lenders, Treasurer Josh Frydenberg said on Wednesday, in an effort to inject funding to capital-starved businesses.

Australian small and medium-sized businesses account for over 40 percent of private sector jobs but funding has been expensive and increasingly constrained, as banks controlling the market face pressure to lend only to viable firms.

“Small businesses find it difficult to obtain finance,” Frydenberg said in a statement. “To overcome this ... the will invest up to $2 billion in the securitisation market, providing significant additional funding to smaller banks and non-bank lenders to on-lend to small businesses on more competitive terms.”

Due to capital adequacy rules, about 80 percent of lending to small and medium-sized businesses by the four major banks - Commonwealth Bank, Westpac Bank, Australia and New Zealand Banking Group and National Australia Bank - are secured by a property, often the business owner’s home.

Loans to small businesses carry average interest rates about 2.15 percentage points higher than facilities to larger corporations, central bank data shows.

“Small business is the backbone of the Australian economy and ... they are doing it tough,” Frydenberg told the Australian Broadcasting Corporation. “They get charged by the banks higher interest rates than what you or I would do if we took out a home loan.”

Non-bank lenders are not licensed to receive deposits and therefore need to fund their operations via alternatives, such as debt capital markets and crowd-sourcing. Frydenberg said that part of the problem was that small lenders were not able to sell their debt to other parties to then fund more loans.

“This is where the government is going to come in and use A$2 billion of the government’s balance sheet to enter into the securisation market to acquire some of that debt,” he said.

Frydenberg said it would target “high-quality debt”. Business loans, however, are notoriously risky, and particularly so when they are not backed by property.

“We will do the right due diligence working closely with the credit rating agencies. The government is in the market for good debt but we want to ensure there is more liquidity, competition and that there are more people offering small business loans than just big banks,” he added.

He said the government’s investment would be to be conducted via the government’s funding arm, the Australian Office of Financial Management, and would be similar to a previous investment in residential mortgage-backed securities in the aftermath of the global financial crisis. ($1 = 1.3854 Australian dollars) (Reporting by Paulina Duran; Editing by Eric Meijer)

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