That " Umbrella " Joke !"

It is often said that the banks are ever ready to offer you the use of an umbrella on a fine, sunny day - and demand you hand it back immediately it begins to rain !    Such is the fine print attached to most small business loans and now at least the Commonwealth bank has agreed to cease such practices on most loan borrowings up to three million dollars.

The contract provision which few people notice when perusing the fine print was the inclusion of what was termed a " financial indicator covenant ".   It was quite possible for the bank to declare a loan in default despite the customer meticulously making all and every repayment in full and on time

One of the methods used is for the bank to call for a re-evaluation of the assets under pinning the loan.  They can put the loan into default if the " loan to value "ratio falls below a certain level.  This is particularly galling to farmers who may have arranged the loan to cover a poor season or to increase  herd numbers to meet market expectations.

The Small Business Ombudsman has called for this contract term to be removed from all business loans below five million dollars and the Commonwealth bank has agreed to meet that request to the three million dollar level.   It is estimated that this will then apply to ninety-five percent of business loan contracts.

In the past, the business world had reason to worry any time the Federal Treasurer expressed concern about national debt levels because the leaders of the big banks send word down the line to tighten the screws on lending.   Not only are new loans much harder to arrange, existing loans come under the microscope and often performing loans are called in just to meet the required new standards.

The business world will await the reaction of the rest of the banking fraternity. The Commonwealth bank is leading the way in removing this clause and there is the expectation that the others will quickly follow.

Banking is - by its very nature - a business of risk.  It loans money to people in the expectation that it will get that money back and make a profit on the transaction, but market forces ensure that a proportion of those loans will fail.  In many cases this will be because of no fault of the borrower.  The expectation was solid at the time of the loan, but conditions change and new innovations quickly alter existing demand.

The biggest employer of people is small business and many of the jobs they offer are off the lesser qualified categories. A business loan is required to establish most new activities and in todays costings most new loans for that purpose are in excess of a million dollars.  It is not encouraging if such loans can be capriciously called in despite meeting the objectives set at the time of the loan.

Obviously, bankers need to be careful with their money, but fairness is essential if the small business world is going to serve the nation as it has done so well in the past.