Over $100bn to encourage lending to SMEs
The government and the RBA have announced over $100 billion to back lending to small business as they struggle to stay afloat and deal with the coronavirus outbreak.
The Morrison government announced on Thursday an investment of up to $15 billion to enable smaller lenders to continue supporting Australian consumers and small businesses.
The government’s actions will enable customers of smaller lenders to continue to access affordable credit as the world deals with the significant challenges presented by the spread of coronavirus.
"Small lenders are critical to Australia’s lending markets, often driving innovation and providing competition for larger lenders," said Treasurer Josh Frydenberg in making the announcement.
This funding will complement the Reserve Bank of Australia’s (RBA’s) announcement of a $90 billion term funding facility for authorised deposit-taking institutions (ADIs) that will also support lending to small and medium enterprises.
"Combined, these measures will support the continued ability of lenders to support their customers and in doing so the Australian economy," Mr Frydenberg said.
The Australian Office of Financial Management (AOFM) will be provided with an investment capacity of $15 billion to invest in wholesale funding markets used by small ADIs and non-ADI lenders.
The $15 billion capacity would allow the AOFM to support a substantial volume of expected issuance by these lenders over a 12 month period.
"Importantly the assets being purchased by the AOFM will not be limited to residential mortgage backed securities. The AOFM will also be able to invest in a range of other asset backed securities and warehouse facilities. The Government will provide the AOFM with investment guidelines that will outline the basis on which the AOFM is to undertake these investments," the Treasurer explained.
Enabling legislation will be introduced in the week commencing Monday, 23 March 2020. The AOFM is expected to be able to begin investing by April.
RBA pledges $90bn
Also on Thursday the RBA announced its $90 billion scheme to provide an incentive for lenders to support credit to businesses, especially small and medium-sized businesses.
"Many small businesses are going to find the coming months very difficult as their sales dry up and they support their staff. Assisting small businesses through this period will help us make that bridge to the other side when the recovery takes place," said the Governor Philip Lowe.
Under this new facility, authorised deposit-taking institutions (ADIs) will be able to borrow from the Reserve Bank an amount equivalent to 3 per cent of their existing outstanding credit to Australian businesses and households. ADIs will be able to draw on these funds up until the end of September this year.
Lenders will also be able to borrow additional funds from the Reserve Bank if they increase credit to business this year. For every extra dollar lent to large business, lenders will have access to an additional dollar of funding from the Reserve Bank; while for every extra dollar of loans to small and medium-sized businesses they will have access to an additional five dollars.
These funds can be drawn upon up until the end of March next year.
"The funding from the Reserve Bank will be for three years at a fixed interest rate of 0.25 per cent, which is substantially below lenders' current funding costs.
"Institutions accessing this scheme will need to provide the usual collateral to the Reserve Bank, with haircuts applying. The first drawings under this facility will be possible no later than four weeks from today," said Mr Lowe.
This scheme is similar to that introduced by the Bank of England, but unlike the Bank of England's scheme, the interest rate is fixed for the term of the funding.