Is your bank negotiable?
The answer to this question heavily depends on the quality of your credit profile. If you are indeed questioning this, you should consider conducting a shadow credit analysis of your company.
Recent anecdotal evidence shows that banks have not been consistent with their approach to the whole borrowing markets, which range from the institutional to the individual end.
Banks’ lending standards to the institutional markets, where transaction sizes are generally larger, have been maintained largely unchanged for the past two to three years. In comparison, however, the lending standards tighten progressively as we move down the credit spectrum to the smaller corporates and businesses.
One would have thought banks prefer a diversification approach – lending smaller sums to a wider market. However, evidence suggests the contrary – there is an explanation.
For every dollar banks lend out, they have to set a portion of capital aside, based on their analysis of the risks (market, credit, and operational) of the underlying assets. The analysis and calculation results in what banks call “risk-adjusted assets”. The whole process is heavily regulated by Australian Prudential Regulatory Authority (APRA). Simply put, the higher the risk-adjusted assets, the more the capital is required.
The bar is now being set even higher by Basel III (and soon Basel IV), the new global capital regulatory framework for banks. The reform, which aims to address the issues that caused the global financial crisis, will increase the reserves that banks globally must hold against potential losses. Key requirements are:
lift the requirement for equity in Tier 1 capital
tighten quality of equity to only common equity, retained earnings and other income
increase the requirement of holding liquid assets such as highly rated short-term paper.
These requirements are designed to ensure prudent management of banks and to increase their financial strengths by decreasing their ability to leverage.
However, the core impact of Basel III is a decrease in the banks’ return on its equity. To counter the impact, banks will have to decrease the proportion of their lower rated assets (or riskier credits) which require higher capital allocation and/or to increase security backing for these loans in their lending books in order to lower the risks.
Unfortunately, the smaller size corporates and small-to-medium enterprises are generally considered the riskier credits. The resultant behaviour is that banks become less competitive in the smaller end of town, often less willing to negotiate on terms and price and gravitate toward the higher rated corporates.
So, if you are feeling unloved by your banks in the past few years, this may mean that your company’s credit profile has fallen into the riskier end. You will need to review your company’s credit profile and devise a strategy to improve your business performance and win back the bank’s attention.