Business Demand for Credit Hits 4-Year Low

Demand among Australian businesses for credit has plummeted to a four-year low, a survey by the National Australia Bank (NAB) showed. Enterprises that required no credit went up to 67 per cent from 64 per cent.

The lower demand for credit came despite borrowing conditions unchanged since the rise in the proportion of borrowers who found it harder to obtain loans was offset by an increase in the proportion who found it easier to obtain credit.

The numbers indicate that many businesses are sitting on their hands, said CommSec chief economist Craig James.

"Either firms aren't keen to take on debt, internal sources of funding are healthy, or firms don't want to take on new projects," Mr James explained.

He added it is not a matter of confidence totally drying up, but many companies prefer to postpone making major financial decisions for the moment as it wait for developments on the European situation and domestic politics as well.

"It appears the caution expressed by consumers is infectious, with businesses also seemingly blinded by the headlights of oncoming traffic," Mr James added.

The lower appetite for borrowing came despite two overnight cash rate cuts made by the Reserve Bank of Australia (RBA) in late 2011 and warnings to the big four by the central bank that the lenders are putting in jeopardy the health of small businesses by hiking their interest rate despite the RBA retaining the key lending rate at 4.25 per cent.

However, the RBA acknowledged that Australian banks are encountering rising cost of funding while some companies opted to borrow directly from investors at lower interest rates.

Other findings of the NAB survey made in January showed that business profitability was down at its lowest level in five months and the level of forward orders, which are lead indicators of domestic demand, slightly improved only but remains depressed.

In a research note, ANZ economists said the two rate cuts made by RBA and improvements in offshore markets apparently failed to significantly improve near-tern growth prospects.