Risk averse Australian banks have lost the art of banking — and it’s hurting our economy


You would be hard-pressed finding a story where one of Australia’s big banks supported an entrepreneur from start-up to a public listing. The Global Financial Crisis coupled with changes to the regulatory environment (e.g. the National Credit Code and the introduction of BASEL II prudential regulation framework in 2008) led to banks understandably avoiding excessive risk. The banks also decided to tighten the availability of credit to a such point it probably inhibited growth. At the very least, they chose to direct funds towards less productive, lower growth-sectors of economy — also quite understandable, then. Now, 9 years post-GFC, not much has changed, especially in terms of business lending, and that is harder to understand.

The Problem

Pre-GFC, most top banks would lend up to 80% of the business valuation to entrepreneurs purchasing an existing business. Now, most banks have credit policies limiting lending to 50% of the business valuation. Things get even harder if you are seeking a loan to start a new business. I hear it first hand from clients all the time – the banks won’t lend because we have no collateral; don’t have a trading history; our credit card debt is too high. The list goes on.

Banks have an obligation to their shareholders but they also have an obligation to consumers. So, surely, with the sheer wealth Australia’s banks are sitting on, there is some room to move when it comes to business lending. If the concept and strategy, cashflow projections, marketing plan, financial plan and the expertise and experience of the owners stack up, why not take a calculated risk?

Banking used to be an art with managers and financiers using their discretion and business acumen to sway the credit department into taking calculated risks — many which paid off in spades. They knew there was a downside risk, sure, but equally that there was an upside risk, with potentially higher returns to the bank, their bottom line and to shareholders. Risk was not the scary, taboo word it is now. It hadn’t been appropriated to me ‘bad investment’. Instead, our modern post-GFC business bankers operate to a strict credit checklist that is ready to obliterate your hopes and dreams of buying or starting a business.

The Solution

Australia has never been short on innovation. Our national attitude of ‘having a go’ gives us a strong culture of innovating, yet our banks’ risk-averse lending criteria means too many of the ideas end up being fostered and brought to fruition by other countries.

Now is the time to invest in innovation again. Now is the time to reclaim the art of banking and redefine ‘risk’. The strong financial position of our banks, coupled with a low interest rate environment are ideal conditions for investment into higher-risk start-up ventures and can help us shift funds away from our property-obsessed economy. The growth and employment prospects this change in risk aversion could bring to our economy would be remarkable. 

Comments (3)
Jef Lippiatt

Jef Lippiatt, Owner at Startup Chucktown

No access to capital makes it hard (or near impossible) to innovate on a rapid timeline. Great points.

Brian Mallyon

Brian Mallyon, Owner at Luckypole Limited

I don't know what happened in banking between 2001-2008, but certainly in my time prior to that, it was very rare for a bank to lend against 80% of the value of a business. It was probably the lending practices and regulations that meant Aussie banks came through the GFC pretty well compared to overseas counterparts. You can be absolutely sure if they hadn't, people would be screaming about the greedy banks getting their just desserts. So where do we find a balance, that is probably a better question. All those excuses listed above are the exact reasons NOT to lend money to people. Why should the bank take on ALL the risk for a transaction where the borrower isn't providing any "hurt" money or collateral, and often nothing more than an idea. Especially when such a large number of these start ups never get going properly, because of the "fail fast, fail often" world we live in. For the true entrepreneurs and innovators where are the VC's and the like? These are the ones whose business is attuned to assisting startups.

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