MED Releases Report on Bank Lending Practices to SMEs - 22 August 2003
Conclusions from a study of New Zealand banks' lending practices, produced for the Ministry of Economic Development (MED) by international financial advisory firm PricewaterhouseCoopers (PwC), suggest there are no obvious signs of inefficiency in the market for lending to small and medium-sized enterprises (SMEs).
The July report looked at the lending practices of seven banks actively involved in the SME lending market and found that the market for SME lending was competitive, both in terms of the number of lenders and the interest rates charged. Banks surveyed by PwC described the SME market as strategically important and a number of banks were aggressively targeting the sector through marketing campaigns and services developed specifically for the sector.
Ministry Deputy Secretary, Lewis Holden, described the report's main findings as unsurprising, saying they confirmed preliminary work by MED. "But it's also reassuring in the sense that SMEs are not being held back by a lack of access to debt finance. On the contrary, debt finance appears to be readily available on acceptable terms for those that meet reasonable lending criteria," he said.
Mr Holden said that the report highlighted particular issues faced by start-up and knowledge-based SMEs. "These two groups face difficulties accessing debt finance because banks typically require both collateral and positive cash flow before they will lend to a firm. These elements are often missing from young knowledge-based businesses."
"But PwC don't consider this to be a problem with the banking system because equity capital is usually more appropriate than debt for these groups of SMEs. The government has schemes in place to improve SMEs access to early-stage equity capital, including the Venture Investment Fund and New Zealand Trade and Enterprise's Investment Ready Scheme," Mr Holden said.
Notwithstanding their generally positive findings, PwC highlighted a number of areas for improvement. Two promising areas for further work include better collection and sharing of SME lending information, and building improved awareness among lending practitioners of the range of business development services available to SMEs through New Zealand Trade and Enterprise. MED intends to engage the industry further on these issues.
Mr Holden said that the PwC report was a useful addition to MED's body of work on the issues facing SMEs. "The report's principal aim was to improve understanding of how banks go about the business of lending to SMEs. To that end, the report's explanation of the policies, procedures and practices that banks use for making loans to SMEs represents a valuable resource," he said.
"Given the importance of the financial system in facilitating economic development, we wouldn't be doing our jobs properly if we didn't take a periodic look at a such a critical part of that system. Banks are the single most important source of external financing for SMEs," Mr Holden said.
The report has been made available on the Ministry's web site
MED plans further work on SMEs' access to finance, notably a survey of business financing in partnership with Statistics New Zealand.
ENDS
Contact: Nick Davis 04-474 2956
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