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Expert urges retailers to brace for credit crunch

A credit crunch could be in store for retailers following the Australian Banking Royal Commission, experts have warned.

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The news comes just months after a report from UBS warns that the flow of credit could be constrained as banks look to undertake more comprehensive assessments of credit applications.

The report, released in April, warns that lending policies inside banks are likely to change following the royal commission – a change that an expert says is likely to significantly affect retailers.

Just last week the Royal Commission released an interim report condemning the banking sector’s misconduct in a document outlining almost 700 questions.

Associate Professor Sean Sands, co-director of the CXI Group at Swinburne University told Retailbiz that retailers should brace for an impending credit crunch on the back of the Royal Commission.

“Fundamentally I think there’s going to be a review of credit apps and credit more generally – there’s going to be those people either single operators or small business owners that will need to either provide more evidence as to historical earnings or income,” he said.

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The retail sector in particular will feel the brunt of this credit pinch, Professor Sands said.

“Lending and loans won’t be as free as they were in the past decade or more. What it comes down to, for retail in particular, is that there’s more store closures and more new stores that pop up and close than in other categories.”

Retailers will need to think smart and get ahead to prepare for this impending crunch, he says.

“Retailers will definitely need to think about what their business is, what their plan is.”

The call comes after UBS analysts warned the credit squeeze could turn into a credit crunch, with analysts saying there “there is likely to be a further substantial tightening in maximum borrowing capacity to come,” UBS analyst Jonathan Mott wrote in a letter to clients on Saturday.

The likelihood of the current credit squeeze turning into a credit crunch is “real and rising” analysts wrote.

“We estimate that the current improvements and tightening of underwriting standards the banks have undertaken have reduced owner occupied maximum borrowing capacity by 7-10 per cent and investment property by ~20 per cent,” Mr Mott said.

It’s this crunch that is likely to see even greater constricting over lending by banks, Mr Mott said.

“We believe the Australian banking sector is facing a period of substantial and sustained earnings pressure which is likely to last several years.”

 

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