Tag Archives: Banks

Bank Lending to SME’s: The Elephant in the Room

SME’s depend heavily on access to capital from their bankers.  Banks repeatedly claim that they are continuing to support Kiwi businesses, but the facts say something different.

Unfortunately the Reserve Bank doesn’t collect data on bank lending to SMEs.  However they do collect data on bank lending to sectors which are intensively populated by SMEs.  These sectors are Construction, Retail Trade, Accommodation & Restaurants, Health and Community Services, Culture and Recreation and Personal Services.  Annual growth rates in bank lending to these sectors shrank from 20%+ in 2007 to 15% in 2008 and then to -3% in 2010 and has only recovered to 4% since.


Their lending commitment to these business sectors looks even worse when inflation is removed.  After removing inflation, annual lending growth to these SME intensive sectors has remained negative since mid 2009.


Banks are incentivised by the Reserve Bank’s capital adequacy requirements to lend on mortgages rather than to businesses.  Banks are required to hold only half the capital for a mortgage loan that they would hold for the same loan to a business.  This is one reason why bank lending to households was over 10 times greater than lending to these SME intensive sectors as at December 2011.

It’s time for the banks to play their part as members of the New Zealand business community and recommit to lending to SMEs.  It’s also time for Government to eliminate capital distortions from the Reserve Bank’s capital adequacy framework and, in so doing, remove the current disincentive to business lending.

Unless we see bank lending growth returning to 2007 – 2008 levels SMEs will remain starved of capital and the New Zealand economy will remain in the doldrums.

Steve Norrie is a Director of Streetwise Consulting