Comprehensive reporting - what's all the hype about?

A long awaited privacy review has finally been released this week by the ALRC, and in it a watered down version of positive credit reporting has been endorsed. As one of only 2 countries in the OECD who currently only provide negative credit reporting, ie when you haven't paid your bills, not when you have, Australian credit risk managers have always done an impressive job given their lack of borrower insight. The US have had comprehensive reporting for a long time and look at the pickle their credit managers have achieved! With the proposed changes, which are odds on to be accepted by the government and legislators, Banks will finally get some deeper insight.

What the banks have asked for and what they have got in the report are not the same thing, and the consumer lobby groups would be pleased, as would the unscrupulous and less financially sound. Ideally (to banks and credit bureaus anyway) the ALRC recommendation would have included the ability for credit histories to contain not only applications for credit (currently included) and defaults in repayment history (generally reported though in practice long after the fact currently), but they would also now store when those applications were accepted and the limit provided (this has been proposed to be included) and current balances (omitted).

Today there are many blind spots in our credit system that allow the credit impaired to still operate and obtain finance under the radar. Banks, though heavily motivated by profit, are also motivated by the "a current affair" factor, and hence are keen to avoid lending to those that might lead them into hot PR water, ie credit cards for dole recipients etc. Consumer Lobby groups have opposed positive reporting seeking to protect the individual from the less scrupulous lenders in the market place who might use the info to prey on the financially impaired with even more vigour than they do today. This, like the argument of regulated gambling, removes the onus of responsibility from the individual wrong doer to the large corporate who is facilitating the ability for the individual to fail - way too involved topic for a Friday afternoon rant! But in the meantime banks are going to still be expected to make sensible lending decisions with one hand tied behind their back, which seems like a bit of a contradictory outcome as far as the consumer groups are concerned - to prevent you marketing to the credit impaired, we'll allow you to not know their impaired. Surely the consumer groups have this around the wrong way?

My humble thoughts are that the credit impaired would be better off if the banks knew that lending to them was wrong (through disclosure of credit position) and then the credit impaired having recourse if the banks pressed on and lent anyway.

Anyway, the point of all this, and my observation, is that business banks don't generally use the information that is available to them today, so providing them with more info not to use is probably futile. Whilst consumer bankers use this information intimately, more often than not credit bureau info is not credit policy for most banks and whilst some still check credit histories of directors, most ignore the credit histories of business. Why? 3 reasons: 1) They get so much other information and have a good trust of their guts (rightly or wrongly), 2) Relatively few banks report poor credit performance because they do not wish to impair a poor clients ability to find finance elsewhere when they tell them that they are not really wanted any more and 3) The cost of automating data updates to credit bureaus, and automating feeds of credit information into lending processes is huge, and banks todate in benign credit envirobnments have not had sufficient business case to make the investment. So unless banks all suddenly chioose to make this investment, they are unlikely to use most of the new info.

have a different opinion - I'd love to hear it!

Banks to increase pricing for existing customers

Under pressure to maintain profitability in an ever weakening credit market, we're hearing that that Major banks here in Australian are currently undertaking reviews of loan pricing for their existing business customers. These reviews are designed to identify businesses where bank revenue returns are not in line with risk profiles, and to ensure that pricing is amended (up) accordingly for these customers.

Whilst such reviews are not a new phenomenon in Banking, some of the new criteria being used to determine risk are, and this will undoubtedly extend the negative sentiment generally held by business towards these large institutions.

An example of these new risk influences is the term of the loan, where long term facilities are expected to draw a new risk rate premium in the new regime. Banks expect the longer the business operates in the current environment, the more likely it is to fail.

This attitude flies in the face of historical understanding relating to credit risk. It has long been understood that the longer a business operates, the less likely it is to fail. It also stands to reason that the longer a loan proceeds, the more is paid off and hence if the business does fail, the losses for the bank are less. This is a significant change if it is true and will impact the price of lending of many businesses. This, combined with the recent observations that bank’s need to incur, and pass on capital costs for lines of credit under Basel 2 [see this business spectator article] suggests that business borrowing costs will only increase.

Excuse the blatant plug but if your bank is putting you through this, then perhaps talking to a commercial finance advisor might help. Having a banker on your side who can help you to prepare your defense against the banks can only improve the outcome and ofrten there is no cost to the service. Give us a call.

My First Blog Blog

I'm starting out on a journey to build a Commercial Finance Advisory business in Australia. What's a commercial finance advisor? We are finance experts, who can offer businesses insights into how banks think. We have worked for banks in the past and we have access to the tools that banks use to make commercial lending decisions. This gives us an ability to help businesses understand what a bank thinks of them before a bank is asked.

My company, Pearl Financial Services Pty Ltd, was actually started by my father 4+ years ago and has written AUD$1.3B in loans (thats nearly USD$1.3b for all my US friends, thanks to near parity in exchange rates!!).

Over the next few months I plan to explore the use of blogging and social media platforms as a tool to raise awareness for our new business. In the meantime if we can help you or friends of yours in dealing with banks for business funding, please give me a shout.