New lending to small businesses has slowed in the past year mostly on the back of the sectors dependence on residential property as collateral for loans, the council said in its quarterly statement.
Nearly half of loans to unincorporated businesses are secured by residential property.
“For many small businesses, personal and business finances are intermingled,” the CFR said.
As a consequence, it explained, the higher standards that lenders apply to personal borrowing are affecting small business loan applications.
However, although the housing market remains weak, the CFR assured that the economy is less vulnerable than in the past.
“The improvement in banks’ lending standards – including a lower share of high loan-to-valuation ratio lending – means that households and lenders generally are less vulnerable to falling housing prices than in the past,” it explained.
The CFR is chaired by Reserve Bank governor Philip Lowe and includes representatives from the Australian Securities and Investments Commission, the Treasury and the Australian Prudential Regulation Authority.
Small business definition
Following their meeting earlier this month, the regulators also said that while changes to the Banking Code of Practice due to commence on 1 July 2019 are significant, their effects still need to be gauged.
“In light of this and the tightening in credit conditions that has taken place, members supported maintaining the current borrowing threshold to define small businesses within the code, with an independent review to be undertaken within 18 months of the code’s commencement,” the CFR said.
Moreover, the council judged that it would be appropriate to consider whether to increase the limit from $3 million to $5 million for all banks.
“Members expressed a view that a limit based on total credit exposures is more appropriate than one based on loan size,” the council added.
