Good morning and thank you for the opportunity to appear before you today.

Commonwealth Bank considers the issues this inquiry is examining as vitally important, not just for banks and for small businesses, but for the broader Australian economy. 

Banks such as ours play a fundamental role in financing the growth and operations of small businesses, which in turn provide jobs in our economy and play a critically important role in their local communities. 

And I’m very privileged in my role to meet with many diverse small business owners and operators around the country, which provides great insight into what is on their minds and how they are performing.

While small businesses play this critical role, it is an unfortunate fact that a high proportion of small businesses do fail, many of them in their first few years, thus presenting a material risk for lenders to manage. 

And when a small business fails, as their bank we too fail. 

So that requires us to maintain a careful balance between managing risk on the one hand, but also funding businesses to grow that we see as one of our key roles as a financial institution. 

If we are too cautious, we risk curtailing growth in the economy, but if we are not cautious enough we can do serious and long-lasting damage to the financial wellbeing of small business owners, put our depositors’ funds at risk, and also potentially fuel systemic risk in the economy. 

This systemic risk impacts not only our shareholders, but as I say, the economy as a whole.

Overall, we believe that our current lending practices are appropriate and do strike the right balance between managing risk on the one hand, and also supporting customer outcomes. 

But, we do recognise the concerns that have been raised through this inquiry, and as you say, previous inquiries, particularly as they relate to contractual terms and conditions of contracts.

So, in response, we are proposing four points of reform that we think are designed to provide greater confidence to borrowers. They formalise practices that are largely already adopted, but maybe not formalised, and also, where appropriate, drive some degree of standardisation across aspects of business lending in the industry.

1. Firstly, we propose that we would remove financial covenants, such as minimum loan to value ratio, from all business loan contracts under $1 million in value. 
2. Secondly, for business loans over that amount, we would propose at least 30 days’ of notice is provided before a lender takes enforcement action following the default of a non-monetary covenant. There may be instances where a more rapid response is required such as where a customer asks for action, or there might be an insolvency event or where the asset is at risk. 
3. Thirdly, as previously outlined at the PJC inquiry, we do support the sharing of valuation reports with customers who have paid for them. We also support the industry looking at a standard around default interest, which I think has been another topic of discussion at previous inquiries. 
4. Finally, we also support the establishment of a national farm debt mediation scheme and some of the other measures around the jurisdiction of FOS that the ABA has provided input to that we can provide more commentary on.

But we do believe the question of how small businesses access finance and manage that lending, whilst of great importance, is only one of the aspects of how we manage our relationship with small businesses, which is a, we would say, fairly complex and multi-faceted issue. 

It’s a lot more than just lending prudently, monitoring risk and enforcing contractual rights. Our absolute purpose is to work very closely with businesses to understand their needs, helping business owners and operators to strengthen their skills in financial management and their overall financial literacy and be very supportive in responding when their circumstances change. 

And I think particularly on the point of financial management skills and financial literacy, this is something that we’re very committed to and recently we have launched a version of our Start Smart financial literacy program that we operate in schools, but we’ve extended that and particularly tailored it to the needs of small business owners and operators. Known as Pathways, the program is offered free of charge, and includes practical advice on matters like applying for funding, managing cash flow and budgeting.

So we do think that the opportunity to uplift the financial skills of small businesses is very important. We also understand that running a small business is challenging and that financial management isn’t always the core expertise. Circumstances can also change quickly and that meeting the conditions of their loan contract can be difficult at times for small business owners and operators, particularly when circumstances change for reasons beyond their control.

But it’s very important to recognise that in the event that a customer is unable to service their repayments or defaults on other conditions of their contract, it is always in our mutual interest, but certainly in the bank’s financial, legal and reputational interest to work very collaboratively with the business owner and look for how we can support them to restore the loan to a more satisfactory position. 

And it’s only when it’s clear that a customer is in such financial difficulty that we will need to start to look at other avenues and potentially look to recover the assets that underpin those loans. But we really do appreciate how difficult those circumstances are. 

And we’re always guided by our values and not solely by the contractual rights that we might have. And we look to support our businesses over time, understand their needs and, in the vast majority of cases, those relationships are far from adversarial; they’re very positive, they’re cooperative and pragmatic. 

So, as I said earlier, we do believe that the question of accessing finance for small businesses is one of great importance. We welcome this inquiry and we certainly welcome the opportunity it presents for us to listen and to potentially look for opportunities to further improve how we service those important needs. 

We’re very happy to answer your questions and we hand over to you, Kate.