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Following on from the release of the Small Business and Family Enterprise Ombudsman’s Small Business Loans Inquiry report, which raised concerns about financial indicator covenants, the bank has revealed that it will no longer be including financial indicator covenants in loan contracts to reduce the likelihood of default.
The financial covenant or condition of most concern to the Carnell Inquiry (Small Business and Family Enterprise Ombudsman) was the loan to valuation ratio (LVR). The removal of this and others such as the interest cover ratio in future and existing qualifying loan contracts means those ratios or conditions cannot be considered as a default cause.
Other clauses to be removed include those known as ‘material adverse change’ that entitle the bank to call a default for an unspecific negative change in the circumstances of the business. As has been industry practice, default events will continue to relate to the operation of the business, such as becoming insolvent, losing an operating licence, or not paying back the loan.
It is thought the change will benefit 95 per cent of CBA's small business customers.
Commonwealth Bank Business and Private Banking group executive Adam Bennett said: “We are simplifying our small business loan terms and conditions to make it easier for our customers. 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.
“Even though we very rarely used these covenants as a reason to foreclose a loan, this means that we will be removing all references to them in our small business loan contracts where our exposure to the customer is below a value of $3 million. We are doing this for all new and existing qualifying customers to provide greater transparency and certainty for small business.”
Existing customers will be advised of the removal of these covenants to their loan contracts while future loan contracts will be simplified "to make it easier for new customers to understand the loan contract".
[Related: ANZ breaks rank on banking reform]