By Vanessa Cavasinni, editor Australian Hotelier
In good news for SMEs, the Commonwealth Bank of Australia (CBA) is the first major bank to scrap the non-monetary default clause from business loans of less than $3 million.
Non-monetary default clauses are widely criticised by businesses, in that they allow banks to default a loan, even if the business is keeping up with repayments. As an example, banks can include a clause in the loan contract that if loan-to-valuation ratio (LVR) fell under a stipulated level during re-evaluation, the bank could default the loan – even if that business was still meeting its repayments.
CBA has announced that it will scrap non-monetary clauses for business loans with a value of less than $3 million. While it is less than the $5 million recommendation of Kate Carnell of the Australian Small Business and Family Enterprise Ombudsman, the move by the CBA is so far the only action taken from one of the big four banks.
ANZ and Westpac are both considering the future use of these clauses in loans of up to $3 million, while NAB is steadfastly opposed to the removal of non-monetary clauses.
Carnell has conceded that for the most part that the banks are making an effort to clean up these clauses, but that more needs to be done in support of SMEs.
“Aside from NAB, these are all steps in the right direction, and we’re listening to what the banks are saying on carve-outs, but fundamentally non-financial default clauses must be removed from small business contracts under $5 million if we’re to ensure all small businesses are safeguarded against what can be the devastating impacts of these clauses.”