Banks squeeze small businesses as credit crunch takes hold

Danny John
Sydney Morning Herald
July 4, 2008

SMALL- and medium-sized companies are being squeezed by the banks, with interest rates on their loans being raised by even more than the amounts added to home loans as a result of the global credit crunch.

Combined with ebbing consumer confidence, the extra interest burden may slow loan growth and push unemployment up, research suggests.

After initially weathering the impact of the global credit crisis, lending to the "engine room" of the economy slowed dramatically in the last quarter compared with recent years, according to JP Morgan and Fujitsu.

Credit growth within the whole business sector in the 12 months to May was 18 per cent, but over the past three months the annual figure has dropped to as low as 6.2 per cent as companies reduce their capital spending plans and tighten cost controls, due to rising interest payments on existing debt. Small and medium enterprises account for nearly a quarter of business lending.

The latest report compiled by the two research houses indicates that businesses are being charged an average of 60 basis points above official cash rates as the banks seek to recover their own higher borrowing costs.

That compares with the 40 basis points above official rate rises on home loans, which has raised the average standard variable mortgage to almost 9.5 per cent and prompted political and consumer criticism of the banks.

While rising loan repayments have added to the mortgage stress faced by an estimated 900,000 Australian home owners, it is the rising cost of business credit, coupled with declining consumer confidence and spending, that could cause more widespread economic damage, the report suggests.

Faced with higher costs and less revenue, businesses are likely to start targeting jobs to make savings. The lower-paid wholesale trade, retail, food and accommodation sectors are the most vulnerable to the slowdown that is already evident domestically.

The senior banking analyst at JP Morgan, Brian Johnson, who helped compile the report, said the increases in company borrowing costs would have a "profound" effect on employment.

These "pressured" sectors account for 22 per cent of employment and their workforces are particularly exposed to job losses because of the large number of part-timers involved. It is estimated they account for 900,000 of the more than 2 million people who work in those areas.

In comparison, the mining sector - often quoted as an economic buffer - accounts for some 100,000 jobs, or just 1.2 per cent of the total.

Consequently, business confidence has held up in the mining industry and in the states where it is strongest - Queensland and Western Australia - while in NSW and Victoria it has dropped by almost 20 per cent in the past few months.

This story was found at: http://business.smh.com.au/banks-squeeze-small-businesses-as-credit-crunch-takes-hold-20080703-319a.html