Big four agree to scrap non-monetary covenants for SMEs

All four of the major banks have confirmed that they will be removing non-monetary default clauses on small- to medium-sized business loans worth less than $3 million, in a bid to improve transparency and fairness.

The move follows on from a recommendation made in the Carnell Inquiry, which was released by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Kate Carnell AO, following a review of the adequacy of the law and practice governing financial lending to small businesses.

According to the Carnell Inquiry, non-monetary default clauses “offend basic principles of fairness” by enabling banks to trigger the default of a business loan where risk factors may have changed, despite the borrower making all payments to the bank on time and in full.

As such, the third recommendation of the report advised that for all loans below $5 million, where a small business has complied with loan payment requirements and has acted lawfully, banks must not default a loan for any reason.

It outlined that any conditions must be removed where banks can unilaterally: value existing security assets during the life of the loan; and invoke financial covenants or catch-all ‘material adverse change’ clauses.

The recommendation was for banks to implement such a change by 1 July 2017, and all four of the major banks have now said that they will scrap such covenants, but only for loans under $3 million (not the $5 million suggested).

Despite the $2 million shortfall, the banks have said that the change will benefit the majority of their small business customers.

Changes cover majority of SME customers

Commonwealth Bank, ANZ, Westpac and NAB all confirmed last week that they would be removing non-monetary covenants, with CBA stating that they were “rarely used” as a reason to foreclose a loan anyway.

Commonwealth Bank Business and Private Banking group executive Adam Bennett said that the changes will benefit 95 per cent of its SME customers, adding: “For almost all of our small business loans, financial indicator covenants will no longer be included in loan contracts and therefore will no longer be a possible cause of default…

“We are doing this for all new and existing qualifying customers to provide greater transparency and certainty for small business.”

NAB has said that the removal of non-monetary covenants on loans worth less than $3 million would “improve transparency and will give greater certainty to 98 per cent of NAB business customers who fall under this threshold”.

The bank’s executive general manager for business direct and small business, Leigh O’Neill, said: “We’ve been working constructively with the industry to address concerns raised in the Small Business and Family Enterprise Ombudsman Kate Carnell’s Small Business Loans Inquiry report.

“We are proud to be helping lead the charge on this – including taking measures beyond the Ombudsman’s recommendation, by applying the measures to all new and existing loans,” she said.

Over at ANZ, the general manager for small business banking, Kate Gibson, said that the removal of financial indicator covenants, such as loan-to-value ratios, would cover 95 per cent of ANZ small business customers.

However, she said that financial indicator covenants “will remain in place for small business customers seeking complex lending or complex products”.

Westpac also said that it would be “removing certain clauses and limiting non-monetary events of default for approximately 95 per cent of its small business lending contracts”.

David Lindberg, chief executive of Westpac’s business bank, added: “We recognise the importance of backing small business to help them grow and support the economy. That’s why we are funding small businesses more than ever before. In 2016, Westpac grew lending by 7 per cent and added $45 billion in pre-approved lending to small businesses.”

[Related: $60bn in major bank lending ‘squandered’]

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Annie Kane

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