So far, housing credit growth has proven more resilient to the economic crisis than expected. Refinancing activity has risen sharply, as borrowers rushed to take advantage of historically low mortgage rates and cash rebate offers. System growth in housing credit was 3.3 per cent over the year to September. This was driven by owner occupier loans, which grew 5.4 per cent, sustained by low interest rates and government incentives, such as the HomeBuilder grant and the First Home Loan Deposit Scheme. Investor lending continued to decline, down 0.4 per cent over the year.
The major banks have been able to use the RBA’s low cost TFF to offer customers attractive fixed-rate home loans, supplemented with cash rebates to win back market share lost after the Financial Services Royal Commission. However, not all the major banks have benefited equally, with strong competition resulting in home loan performance diverging between individual banks.
Concerned that responsible lending obligations might be unduly constraining banks’ lending, the Federal Government has proposed removing most of the obligations currently included in consumer protection legislation. The aim is to eliminate confusion and ambiguity over compliance requirements and reduce verification and inquiry requirements to minimise loan processing delays.
In a move that may also boost lending, the banks are starting to reverse the stricter lending criteria introduced in the early stages of the pandemic for borrowers in industries and areas considered most at risk. This includes easing certain maximum LVR limits but retaining appropriate differential pricing for higher risk loans.
Over the year to September, system growth in business credit was 2.0 per cent, driven mainly by large businesses. There were sharp monthly increases in March and April, as businesses drew down on existing facilities or sought facility increases to boost liquidity.
SME credit growth has remained relatively flat despite Phase 1 of the government’s $40 billion COVID-19 SME lending guarantee scheme, which aimed to provide SMEs with working capital. Phase 1 generated around $2 billion in loans, with two of the major banks accounting for most of the lending. Reports suggest the modest take up under Phase 1 of the scheme may have been due to SMEs wanting greater flexibility in terms, scope and interest rates.
To address these issues, Phase 2, announced in September, incorporates an increased maximum loan size, extended terms, an expanded range of purposes and a cap on interest rates of around 10 per cent. These changes should see more borrowers qualify and apply for funding. The Phase 2 panel of lenders approved to issue the loans, which are 50 per cent backed by a government guarantee, includes the major banks, other ADIs and specialist, non-bank business lenders.
As the Government introduces economic recovery measures to encourage business investment and cash flow for SMEs, some banks have announced increased numbers of business bankers and enhancements to lending services to further support SMEs.
Over the six months to August, personal credit and charge card balances declined sharply, falling by 19 per cent. The decline partly reflects householders paying down debt in the face of the uncertain economic outlook and virtually non-existent overseas travel. However, the use of credit and charge cards was already falling well before the COVID-19 pandemic, possibly reflecting the emerging popularity of non-credit, ‘buy now, pay later’ (BNPL) alternatives. BNPL offerings are particularly attractive to younger customers, who are keen to avoid the interest charges associated with traditional credit card products. In response, some of the major banks have invested in BNPL providers and introduced new ‘no interest’ credit card products to attract a younger cohort.