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.
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