2. Overview of SMEs and Bank Lending
Defining SMEs
There is no standard definition of a SME, and the classification varies widely across different countries.4 The parameters that are most commonly used when classifying SMEs are number of employees, turnover and level of capitalisation/value of assets.
The definitions given to small and medium sized enterprises internationally tend to incorporate entities that are significantly larger than SMEs in New Zealand. This reflects, among other things, the relatively small size of the New Zealand economy.
The definition of a SME used by the Ministry5 is businesses employing 19 or fewer FTEs. Further, this definition is split into two parts:
- small businesses: 0-5 FTEs; and
- medium businesses: 6-19 FTEs.
The definition of SMEs is not consistent across the banks interviewed as part of this study. Moreover, they generally do not use FTEs as the basis for defining SMEs. Rather, banks generally define SMEs according to:
- turnover, where the upper limit used by banks to define a SME was between $2 million and $10 million; and
- exposure level (i.e. size of borrowing). The larger banks consistently define SMEs as having borrowings less than $5 million. The exposure levels for smaller banks are at lower levels - generally in the region of $750k.
For the purposes of this study, we have not attempted to apply a rigid criterion to define SMEs. To do so would have been impractical given that the banks use different definitions of SME and cannot easily massage their data to fit with a "standard" definition. Accordingly, we have worked within each bank's definition of SMEs and, to the extent possible, attempted to draw some conclusions from the information provided, notwithstanding that there is a degree of comparing "apples with oranges".
SMEs in the New Zealand Economy
The SME sector in New Zealand is large and diverse. As shown in the diagram below, SMEs employing 19 or fewer FTEs comprise 96.4% of all enterprises in 2001.6
Source: Ministry of Economic Development
SMEs with 19 or fewer FTEs provide employment for nearly half of the working population and produce 39% of the total output for the New Zealand economy.7
The SME sector in New Zealand is also diverse, making up a large proportion of almost every industry, as shown in the following table.8 More than 70% of entities in all industries (except government and education) are small enterprises with less than six FTEs. This illustrates the prevalence of SMEs in the New Zealand economy in all industries.
| Industry | Small | Medium | Total SMEs | Non SMEs | Total |
| Property | 95% | 5% | 100% | 0.4% | 100% |
| Construction | 90% | 10% | 100% | 0.4% | 100% |
| Retail Trade | 81% | 18% | 99% | 0.9% | 100% |
| Manufacturing | 70% | 26% | 97% | 3.4% | 100% |
| Wholesale Trade | 79% | 20% | 99% | 1.3% | 100% |
| Personal and Other | 89% | 11% | 100% | 0.4% | 100% |
| Agriculture | 89% | 11% | 99% | 0.5% | 100% |
| Finance and Insurance | 95% | 5% | 99% | 0.7% | 100% |
| Health and Community | 78% | 20% | 98% | 1.7% | 100% |
| Recreational Services | 91% | 9% | 99% | 0.6% | 100% |
| Transport | 84% | 14% | 98% | 1.7% | 100% |
| Hospitality | 66% | 33% | 99% | 1.2% | 100% |
| Communication | 94% | 5% | 99% | 0.8% | 100% |
| Education | 48% | 47% | 95% | 5.0% | 100% |
| Mining | 73% | 25% | 98% | 2.4% | 100% |
| Utilities | 70% | 15% | 86% | 14.2% | 100% |
| Government | 14% | 29% | 43% | 57.4% | 100% |
| Weighted Average | 86% | 13% | 99% | 1.0% | 100% |
The average size of SMEs has changed over time. Between 1994 and 2001, the average number of FTEs per SME business reduced from seven to just four.9 In addition, the number of SME businesses with less than 10 FTEs has increased at an average rate of 5.4% per annum since 1998.10
The concentration of SMEs is significantly higher in New Zealand than in most other developed economies. As illustrated in the chart on the following page, less than half of the enterprises in the United States would be classified as small (less than 9 FTEs), compared to 91% in New Zealand.
Although not included in the graph on the following page, both Australia and Canada have similar concentrations of SMEs to New Zealand. In Australia, 81.8% of businesses employ less than 5 FTEs and a further 6.4% of businesses employ between five and 20 FTEs.11 Canada has a slightly lower proportion of small businesses (between zero and four FTEs) at 78.3% of businesses. A further 18.9% of Canadian businesses employ between five and 49 FTEs.12
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Source: Ministry of Economic Development, (2002) SMEs in New Zealand: Structure and Dynamics
The Banking Sector
As at 30 June 2003, there were 18 registered banks in New Zealand.
The focus for this study has been on those banks that are actively involved in lending to SMEs. Following discussions with the Ministry, the New Zealand Bankers Association and the banks concerned, the following were included in the study:
- ANZ Banking Group (NZ) Limited
- ASB Bank Limited
- Bank of New Zealand Limited
- Westpac Banking Corporation
- National Bank of New Zealand Limited
- Hong Kong and Shanghai Banking Corporation
- TSB Bank Limited.
Of these banks, five (ANZ, ASB, BNZ, National and Westpac) represent 84% of the total assets of all registered banks operating in New Zealand13.
Bank Lending to SMEs
During the course of discussions, the banks made a number of points regarding the market for lending to SMEs:
- The banks perceive there to be vigorous competition for market share in the SME sector.
- Many of the banks are targeting this sector. A number of tools are being used to increase banks' focus on the sector including undertaking and publishing market research, a shift toward more emphasis on relationship management and greater use of performance measures at relationship manager level aimed at growing the SME loan book.
- Most, but not all, of the banks perceive the SME sector to be profitable and these banks are deploying more resources to capture greater market share.
- There is a renewed focus by banks on the SME market. This involves packaging different banking services into a combined service offering, providing more economic and business related information to their SME customers and renewed emphasis on relationship management (discussed further in Section 3).
- Banks are 'defending' existing client relationships. This includes more regular reviews of facilities and pricing reductions to match competitive offers.
Most of the seven banks lend to a wide cross section of businesses in the SME sector in terms of industry, business size, and location, although some of the banks have a particular focus on parts of the SMEs market (defined in geographic or other terms, such as rural lending).
Lending by Industry
The banks were asked to provide a breakdown of their SME lending by industry. The industry breakdown was based on the breakdown used by Statistics New Zealand in their business demography statistics. Potentially the classifications used by the banks may differ from the exact classifications used by Statistics New Zealand. Of the three banks that responded to this request, the main areas of lending are personal and other services such as hairdressers, video stores, dry-cleaners (25%), agriculture, forestry and fishing (20%) and property and business services (18%). The full breakdown is illustrated on the following page.
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Source: PricewaterhouseCoopers
This breakdown of lending to SMEs by industry is broadly similar to the proportionate number of SMEs broken down by industry as shown in the table below, although there are some differences.
| Lending | Industry |
| Agriculture, Forestry & Fishing | 20% | 4% |
| Technology | 0% | 0% |
| Retail Trade | 9% | 12% |
| Manufacturing | 7% | 7% |
| Mining | 0% | 0% |
| Electricity, Gas & Water | 0% | 0% |
| Construction | 4% | 12% |
| Wholesale Trade | 5% | 6% |
| Accommodation, Restaurants, Cafes | 2% | 3% |
| Transport & Storage | 2% | 4% |
| Communication Services | 0% | 1% |
| Finance & Insurance | 2% | 4% |
| Property & Business Services | 18% | 33% |
| Government Administration | 1% | 0% |
| Education | 0% | 2% |
| Health & Community services | 2% | 4% |
| Cultural & Recreational Services | 1% | 4% |
| Personal & Other Services | 25% | 4% |
| 100% | 100% |
Sources: PricewaterhouseCoopers; Statistics New Zealand, Business Demography Statistics 2002
Based on the above comparison, there is relatively more lending to SMEs in the agricultural and personal and other sectors than would be expected given the distribution of SMEs across the economy. In contrast, there is relatively less lending to the construction and property and business services sectors. Of these sectors, the banks specifically noted the property sector as being higher risk.
Lending to Technology-Based SMEs
The banks were also asked, as part of the breakdown, to indicate the proportion of lending to technology-based SMEs. In general, there is little or no lending to businesses in this category (although banks' data does not necessarily include "technology" as a sector). The issue of lending to technology-based SMEs is discussed further in section 4 of this report.
Lending by Number of Loans
Approximately two thirds of all business loans are made to SMEs. Given that SMEs make up a large proportion of the total number of enterprises in New Zealand, it is not surprising that in terms of the number of loans, the large majority are made to SMEs. The graph below shows the position for three banks that provided relevant data.
Source: PricewaterhouseCoopers
Lending by Value of Loans
In value terms, SME loans represent only a small fraction of the value of total bank lending. Based on data provided by the banks, the value of SME lending as a proportion of total lending varied from between 3% and 16%.
Lending by Size of Loan
The average amount lent to SMEs varies across the banks interviewed. Averaged across the three banks that provided data, 90% of loans were for $500,000 or less as shown below.
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Source: PricewaterhouseCoopers
The loan size, on average, has been reducing in recent years, which is consistent with the data reported earlier that SMEs have been getting smaller.
| | 2000 | 2001 | 2002 |
| Average Loan Size | $287,972 | $242,854 | $172, 840 |
Lending by Facility
The types of facilities used by SMEs broadly reflect the facilities used by all business customers.14
The main areas of difference between SME lending and business lending generally are that SMEs:
- Seldom utilise specialist facilities, such as treasury and trade finance.15 In contrast, these facilities constitute 16% of the borrowings by business customers.
- Tend to take on loans with longer duration compared to business customers. More than half of SME borrowings are in the form of term loans greater than four years, which reflects the preponderance of residential backed mortgages16 as security for SME loans.
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Source: PricewaterhouseCoopers
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