Small Business Lending
In Australia

April 2013

Executive Summary

In the past 4 and half years, ICBC has been growing its Corporate and Institutional Banking businesses in Australia. ICBC does not have a separate product line covering sub AUD$2 million transactions, where the borrowers are mainly Small & Medium-Sized Enterprises (SME). All local big 4 banks and other established institutions have specific products and business groups specialized in these transactions, called Small Business Banking, where NAB and CBA are leading in market shares.

Products under Small Business Banking include Merchants, Cards, Payments, Small Loans and more. We should be aware that ICBC could not provide any retail or insurance based products to SME, therefore our strategy is limited in trying to implement product bundling for client. While maintaining and assessing sub AUD$2 million transactions with small businesses, banks must implement extra attention to details and higher level relationship maintenances than Corporate and Institutional Banking. Recent surveys and studies suggested that significant number of SMEs showed disappointments in existing banking relationships and actively looking for alternatives that could provide comprehensive services and full understanding of their businesses. Frustrations derived mainly from increased pressures in level of security provided, cost of credit facilities, and inability to demonstrate knowledge in specific sectors.

This report explained the schematics of SME market in Australia and its ability to access finance from commercial banks. We also demonstrated in details, the market condition post-GFC and existing issues in SME banking relationships. Through examinations, we discuss the feasibility for ICBC in setting up small business lending team and capture the market shares, which would be undoubtedly profitable given the recovery of the global economy and the need to switch lender from SMEs.

Introduction

For ICBC to grow into a true player in domestic loan market, we need to have product specializations and focus. Hence we shall not neglect to expand our range of services. Due to requirements from ICBC Wholesale Client Checklist, most small businesses in the country would deemed unqualified as ICBC clients. We believe the Australian market, especially Victoria and NSW, is a SME focused region, where lots of potential transactions would fall into the sub AUD$2 million category (see chart below). Consequently, by not capturing this large share of bilateral banking relationships, ICBC is not collectively exhausting all transaction opportunities.

Increasingly, Australian markets are experiencing strong growth in the number of SME in recent years. Big 4 banks have been active in implementing strategy changes to meet the market demand in business banking. For instance, ANZ pledged AUD$1 billion for funding “Start-Ups”, which by their definition is small businesses (Cain, 2013).

SME (Small & Medium-sized Enterprises)

SME, or small businesses, are an integral part of national economy of Australia. They play a significant role in the Australian economy, accounting for almost half of employment in the private non-financial sector and over a third of production.

The common consent of the annual turnover size for SMEs would be under AUD$20 million. The Senate Economics Reference Committee suggested that the size of a business loan is a likely proxy for the size of the borrower and that loan under AUD$2 million could be assumed to be directed to SMEs, with the majority loans sit between AUD$ 200,000 and AUD$ 500,000 (CPA 2012). The chart below showed different definitions used in Australia:

The graph below showed trend in new credit approvals by size of loan:

The graph above shows that loans under AUD$2 million peaked at AUD$23 billion in June 2008, dipping to a low of AUD$15 billion in March 2009, before a slow increase with some fluctuations in the