Coronavirus: Have the banks let us down?

Friday, 8 May 2020

Economist and business commentator Shamubeel Eaqub talks to Radio Tarana news editor Sanjesh Narain about the impact of Covid-19 on the New Zealand economy.

ANALYSIS: A week is a long time in banking, or politics — one or the other.

Finance Minister Grant Robertson said last Friday that it had become clear that the support banks were providing to small and medium-sized businesses was 'not meeting their needs nor our expectations as a Government'.

A few days later, a fiery Associate Finance Minister Shane Jones pushed the boat out further, warning that banks were in danger of jeopardising their “social contract” if they didn't do more to help businesses survive the Covid-19 disruption.

Yet delivering a pre-Budget speech on Thursday, Robertson had only warm words for the banks, saying they had 'worked constructively with the Reserve Bank to assist the worst-affected businesses and households'.

From the very start of the coronavirus crisis, Reserve Bank governor Adrian Orr has repeatedly emphasised that the central bank will be closely watching bank behaviour, egging them on to take greater risks to help cash-starved businesses survive the crisis.

* Government offers small firms zero and low-interest loans up to $100,000

The Business Finance Guarantee Scheme appears to have been a flop, before it was overhauled last week.

* Coronavirus: Budget 2020 may be time to look beyond Covid-19 'relief' and towards recovery

There is no obvious, outward sign the banks changed their attitudes towards lending during the week, so what to make of it?

It pays to note that Robertson made his initial criticisms of the banks at the same time as announcing the Government's small business cashflow scheme.

That initiative will see the Government bypass the banking sector to provide probably a few billion dollars-worth of zero and low-interest loans to small businesses.

Finance Minister Grant Robertson said the banks had not met the Government's expectations, but later said they had worked constructively.

The scheme would make little sense if there was no lending problem to fix.

But the harshness of his criticism reflected the fact that there had as yet been very little uptake by banks or businesses of the Government's 'business finance guarantee scheme'.

The Government has agreed under that scheme to guarantee up to 80 per cent of normal bank lending to small businesses, to the value of $6.25b — so $5b of lending in total.

BNZ has so far lent only $5m to 33 customers under the scheme.

But it says it is seeing many businesses choose instead to extend their existing overdrafts while they consider whether the government-guaranteed loans suit their purposes.

Westpac said it had approved 52 loans totalling $6.7m under the scheme and had received 74 'expressions of interest' about it, most of which it was still working through.

'It can take some time for a business to pull together a full application,' it said.

BusinessNZ chief executive Kirk Hope says there a few reasons that the scheme didn't take off in its original form.

BusinessNZ chief executive Kirk Hope says banks have done 'a good job' outside of the government scheme.

One was that small businesses themselves struggled with a requirement that firms provide the Government with a general security over their assets.

A snag was they might have already given other creditors potentially conflicting guarantees.

The scheme has recently been tweeked to make it much more appealing to banks and businesses.

Hope fears there may still be 'wrinkles' in it, but says banks have been doing a good job of supporting their customers through their general lending in the interim.

Banks have lent firms $7.1b outside of the business finance guarantee scheme since the country went into lockdown on March 26.

'That's more than they would have done in the same period in 2019, in a more challenging environment,' Hope says.

That suggest that Robertson's more recent comments that banks have been working constructively to assist businesses may better reflect the reality on the ground.

That doesn't mean that there won't be many businesses that will have been disappointed to have been refused credit, or some that might have a legitimate grievance.

There is perhaps an element of a 'prisoners' dilemma' at play that could underlie Orr's concerns.

What might be the best lending decision for an individual bank might not always be what's best for the banks collectively, or the economy as whole.

But as a Beehive source noted, it would have been a big surprise if Shane Jones had come out complimenting the Australian-owned banks for their performance in balancing that conundrum.

There's no harm in keeping the pressure on them, perhaps.

Infometrics economist Brad Olsen notes the Government is still under a lot of pressure itself to ensure that businesses can continue operating.

'The conversations I am having with businesses do seem to indicate that they are running low on working capital under level 3.'

Banks are 'stuck between a rock and a hard place', doing the best they can under the circumstances, he says.

'They are trying to lend to keep businesses going, but at the same time they do have to remain circumspect about the viability of some of those loans.

'It is unconscionable to load debt onto firms that are not going to be able to be as viable as they were previously.'