Report Tracks Rise in Borrowing by Australia’s SMEs

Australia’s largest institutional businesses could soon deposit more than they borrow from the banking system, while at the same time small and medium-sized enterprises (SMEs) borrow more than they save predicts East & Partners.

The ongoing trends are noted in the research and analysis firm’s
Deposit Funding & Debt Index (DFDI)
research, a monthly look at deposits and lending in the banking system based on data from the Australian Prudential Regulatory Authority (APRA).

The DFDI creates a ratio based on deposits and lending. A DFDI ratio of over 1 indicates higher deposits relative to borrowings, while a ratio of less than one denotes higher borrowings. The one year trend has been for the DFDI ratio for the largest institutional businesses – those with more than A$725m in annual revenues – to go higher as the segment deleverages.

While the institutional DFDI was at 0.57 in April 2013, it had risen to 0.89 in the most recent February 2014 research round. This means that for every A$1 the institutional segment has in deposits, it has 89 cents in borrowings from the bank system.

In contrast, the DFDI ratio for the SME segment – of businesses with annual revenues of A$5m-25m – has gone from 1.94 in April 2013 to 1.18 in January 2014. Where SME businesses had A$1.94 in deposits for every A$1 borrowed in April that has now fallen to A$1.18.

If these trends continue, the Institutional DFDI could move higher than 1 in the first half of this year, while the SME ratio could fall below 1. This would represent a significant event in deposit and lending trends as institutions would – for the first time since East’s DFDI program began in July 2010 – become net depositors. SME’s would become net borrowers – also for the first time.

“We’ve seen for some time that larger businesses have been deleveraging as smaller ones releverage,” said Lachlan Colquhoun, East’s head of market analysis

“These DFDI ratios are also corroborated by data from our other programmes on credit demand, which show a clear change in sentiment between the segments. It shows that that the business segments are travelling at different speeds and have varying dynamics, all of which is adding to business and economic uncertainty.”

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