Continuing the discussion from Doing business in China-ask us anything:
Not my writing but thought it was a good summary of the why, why not, positives and negatives of recent moves by Australian banks to limit lending to foreign nationals. Now that it’s happened in NZ it is a similar and relevant story. The article was written by David Thomas…
A new era for Australian banks?
In April and May 2016, all major Australian banks announced that they had tightened the rules for lending to foreign nationals buying residential properties. The succession of announcements has undoubtedly caused much alarm across the community, with many claiming that despite Australia being ‘open for business’, these changes reflect entrenched anti-foreign investment sentiment, particularly towards Chinese investors and buyers, in our banking institutions. Some commentators have predicted that applications made by Chinese investors and buyers, who have largely been driving the property market boom particularly for off-the-plan apartments, will be consistently denied, resulting in a devastating crash in the property market.
To be fair, not all banks have completely halted foreign lending. For example, NAB announced that it will only lend up to 60% of the value of the property to foreign nationals and recognise only 60% of their income earned offshore. ANZ will no longer grant loans to borrowers who generate 100% of their income offshore and will introduce stricter documentation requirements. Whilst Westpac and its subsidiaries say they will no longer lend to foreign nationals.
Why did it happen?
The reasons behind the regulatory changes are multi-faceted. After Australia weathered the Global Financial Crisis, a gradually increasing demand in the property market created an impetus to increase supply. This saw a flurry of activity amongst property developers, with more approvals, more projects and the sale of more stock. Combined with record-low and falling interest rates and an expectation that the market would continue to rise, more and more buyers and investors entered the market creating a buying frenzy. In addition to property prices reaching unprecedented heights, the banks also increased their lending to capitalise on the influx of buyers and investors and to capture their market share.
This, however, has considerably slowed down. The buying frenzy has resulted in some malpractice and even fraud with numbers of foreign loan applicants being found to have provided forged and fraudulent support documentation. In addition, it has been found that many speculators who purchased off-the-plan properties were only paying a 10% deposit with a view to transferring them to other buyers with no intention of completion. APRA, the banking regulator, has put serious pressure on the banks to clamp down on their approval processes to squash such applications. In addition, the Government has slowed things down by changing the rules under FIRB to limit the type of properties foreign nationals can purchase and the increasing application fees and stamp duty they must pay.
Is it good or bad?
It is unquestionable that the banks needed to clamp down on fraudulent applications and tighten up their approval processes. It is in nobody’s interest to encourage disingenuous buyers and investors who are at serious risk of defaulting on their loans. Also, it brings about a much-needed pause in the market that was in danger of getting out of control.
However, announcements like this are perfect fuel to the fire that Australia is closing its doors to foreign investment. These announcements have been misconstrued and translated to the Chinese (via media and other channels) that the banks have completely halted all lending to foreign nationals, creating much animosity, anxiety and frustration.
What has been revealed?
These recent events have exposed a broader issue that needs to be considered, addressed and tackled – major differences in business culture and practices. The environment, culture and framework of Chinese and Australian banking institutions are vastly different. Their approaches to rules, regulations and approval processes, as well, differ greatly. Australian banks are notorious for their rigorous application and approval processes, particularly in regards to their inability to recognise and value overseas assets. Applicants are also obliged to supply huge amounts of documentation for a seemingly simple request. Whilst processes in Chinese banks are more flexible, with less onerous documentation requirements.
There is also a need to consider employment differences and the effects these have on loan and credit applications. Banks in Australia require all applicants to supply pay slips to support their credit and loan requests. However, in China, providing employees with pay slips is not as common as it here. It also does not help that many wealthy Chinese investors and entrepreneurs are self-employed and generate their income from a variety of sources such as other domestic and international investment portfolios. It has been our experience that both sides do not understand one another’s processes and the reasons behind them, creating immense frustration – Chinese applicants do not understand why they need to provide huge amounts of supporting documentation and Australians get frustrated with their aversion and inability to provide such information.
What can be done?
It is unreasonable to expect banks to change their processes for one group of borrowers, especially in light of recent events, but there is a growing need for flexibility. If Australia wants to continue to capitalise off the influx of Chinese investment and the greater opportunities arising from the Asian Century, our institutions have to look at solving these issues in new innovative ways.
On an executive level, there needs to be greater education and training about China’s regulatory frameworks and how and why they differ to ours. Perhaps it is time for executives to think innovatively about the methods they use to assess a borrower’s eligibility, level of seriousness and commitment? One possible method could be the utilisation of their China branches. Many Australian banks have established branches in China with the aim of promoting Australia to local market but have very little to do with assessing loan applications. Could it be possible that their local staff (all with the necessary language ability and cultural understanding) could be mobilised to help assess such applications, verify the relevant documents and interview potential clients to establish the full picture?
And on a front-line level, staff need to have the education and training to better inform and advise Chinese-speaking customers about the bank’s processes, just like how they assist and advise their English-speaking customers.
Of course, the onus is not just on Australian banks. Chinese investors need to understand that what makes Australia the safe and profitable investment market it is, is our stringent and strict regulations that protect the market, our institutions and their customers.
I think these recent events have been a taste of what is to come as Australia and China continue to do business with each other. Cultural differences will always be one of the biggest obstacles in cross-border deals so there needs to be a concerted push to better educate both sides about these differences. Once the property market has returned to “normal” levels, I urge our banks to think differently and innovatively about how they can continue to ride the wave of Chinese investment into Australia. If they can do this, our banks could be the paradigm of change for our other institutions, businesses and communities to modify and adapt their mindsets, adopt more flexible practices and play a leadership role in embracing the opportunities and challenges of the Asian century