Australia's proposal to ease its responsible lending rules for banks as it struggles with its first recession in three decades is unlikely to boost credit growth in the economy as both borrowers and lenders remain cautious, analysts say.
Instead, the move has raised fears that it may expose less-informed borrowers to the very risks that a Royal Commission sought to address following years of aggressive selling practices by the nation's financial companies.
The government's Sept. 25 legislative proposal to remove the responsible lending obligations from the National Consumer Credit Protection Act 2009 is aimed at reducing the time and cost of credit assessments for consumers and businesses and speed up lending by banks that may have becoming overly cautious. The government said it is seeking to remove a one-size-fits-all approach. "Responsible lending has become restrictive lending," Treasurer Josh Frydenberg said.
The proposed change has been criticized by consumer groups who say it will remove bank responsibility to customers and opens up new opportunities for banks to aggressively sell debt.
"From a consumer perspective, this is a concerning move as it essentially puts the responsibility on the individual to declare all facts accurately, in what is an unequal relationship," Martin North, founding principal and banking sector analyst at Australia-based Digital Finance Analytics, told S&P Market Intelligence.
"Consumer advocates are right to call out the unequal relationship between banks and lenders, and that the acid is being put back on consumers ... the Royal Commission highlighted the poor behavior of the banks, and I do not think the culture has fundamentally changed," he said.
The government needs to balance between pulling the economy out from a recession and protecting borrowers' interests after the economy contracted 6.3% on year in the June quarter. The Haynes Royal Commission's report released in 2019 had highlighted a number of failures among financial companies, including instances where mortgage brokers pushed borrowers into taking out bigger loans than they could afford, to boost their commissions.
The nation's major banks have taken heavy costs to clean up such cases of misconduct. For example, Westpac Banking Corp. accounted for A$1.3 billion in civil penalties for admitted violations to Australia's anti-money-laundering and counterterrorism-financing laws. Commonwealth Bank of Australia faced a number of lawsuits over misconduct and was recently fined for breaching responsible lending provisions.
The Royal Commission was mostly centered on wealth management but it also recommended that the credit law should not be amended. Under the proposed changes, responsible lending obligations will still apply on small amount credit contracts and consumer leases, where the rules will actually be tightened. Banks will still need to comply with the Australian Prudential Regulation Authority's lending standards but they will now rely on information provided by borrowers, who will be more accountable for providing accurate information.
"As we learned to our cost during the [global financial crisis], weaker lending standards mean people will be loaded up with as much debt as possible. There is significant profit to be made in pushing borrowers to the edge," Fiona Guthrie, CEO of Financial Counselling Australia, said Sept. 25.
Australia and New Zealand Banking Group Ltd. CEO Shayne Elliott was reluctant to forecast an increase in lending from any changes to the responsible lending law. At the bank's Oct. 29 earnings call he said that even if the responsible lending legislation is removed, "it makes the operational aspects of it easier but it doesn't fundamentally change our risk appetite."
"What will happen is that the process for borrowers will be faster and less invasive. So we think it's about operational efficiency rather than unleashing any sort of new loan growth. That's our view anyway," Elliott added.
"I think the move is an incremental positive — but it's not a massive change," said Omkar Joshi, principal and portfolio manager at Opal Capital Management. "However, I don't think there's going to be big spurt of credit growth. The reality is there has been access to credit."
Joshi said the changes to lending laws may help build confidence in both borrowers and banks and loans might get approved faster.
Data from the Australian Bureau of Statistics shows that in September, new loan commitments rose 5.9% from the prior month for housing to A$22.54 billion. Personal fixed-term loans rose 8.5% to A$1.49 billion. Total credit rose to A$2.993 trillion in September from A$2.990 trillion in August, according to the central bank. The increase in home loans has been bolstered by the government's First Home Loan Deposit Scheme, which is an initiative to support first-time home buyers and allows them to acquire a mortgage with as little as a 5% deposit.
Overall, Digital Finance Analytics' North said the changes to the responsible lending is "net positive for banks and their shareholders and negative to consumers."
"In addition, lenders are showing greater caution in some sectors of the market and I expect a marginal improvement in momentum, but not revolutionary," he said.