The initiative from “Team Australia” will come at a significant cost to the banks, however, with some estimating that almost one-quarter of these deferred loans, or $45 billion worth, will turn bad over the next three years.
Banks and their shareholders have already begun to feel the pain, with interim results from the big four banks revealing a 57 per cent fall in net profit to $6.2 billion.
Banks have taken $3.5 billion in additional provisioning as a precaution against bad debts, with the number expected to rise to $5 billion on Wednesday when the Commonwealth Bank provides a quarterly trading update.
SMEs desperate for backstop
With NAB slashing its dividend and ANZ and Westpac deferring any decision on the distribution, shareholders will receive about $10 billion less in dividends and franking credits compared with 2019.
The tab from the COVID-19 crisis will not just be picked up by bank shareholders as the federal government spends more than $200 billion on stimulus measures and other forms of assistance, including the $130 billion JobKeeper package.
A 50-50 joint venture from the banks and the federal government featuring $40 billion of cheap funding aimed squarely at keeping the tens of thousands of small businesses ticking over, known as the SME Coronavirus Guarantee, has also begun to gain traction.
As of Friday, the value of loans backstopped by the government reached $1.2 billion, with as many as 12,423 businesses receiving funding.
The average size of each loan is about $95,000 with the maximum loan size capped at $250,000. The interest rate on the loans is about 4.5 per cent, or about half the rate banks would traditionally charge for unsecured lending to small businesses.
Treasurer Josh Frydenberg said the SME loans were an important part of the package. Alex Ellinghausen
Federal Treasurer Josh Frydenberg said he was pleased at the take-up of the scheme which allowed lenders to tap a special funding facility set up by the Reserve Bank charging just 0.25 per cent.
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“The government is providing an unprecedented level of support through our SME loan guarantee scheme in partnership with more than 39 approved lenders,” Mr Frydenberg said.
“Along with other measures the government has implemented as part of its economic response to the crisis, these loans will help small and medium-sized businesses build a bridge to the other side of the coronavirus.”
Commonwealth Bank has approved more than 6500 loans totalling more than half a billion to SMEs under the program.
CBA’s group executive of business banking, Mike Vacy-Lyle, said getting money into the hands of customers quickly was a make-or-break moment for many.
“We have now approved more than $555 million of loans to customers which is a vital step in providing support, and a future, for thousands of Australian businesses,” Mr Vacy-Lyle said.
“Getting funds quickly to our customers means they have the cash flow they need to pay for critical expenses like wages, supplier payments and other overheads.
“We are doing all we can to help. The sheer demand we are seeing means our teams are working around the clock to help as many customers as possible and our priority right now is to get funds into accounts as quickly as we can.”
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James Frost writes about banking, funds management and superannuation. Based in Melbourne, James has been reporting on specialist business and finance topics for 15 years. Connect with James on Twitter. Email James at [email protected]