Lending to miners and related service companies may be a source of elevated concern for Australian banks, in spite of a low business failure rate and seemingly benign data on loans to the sector.In its quarterly Financial Stability Review the Reserve Bank of Australia last week wrote: "Despite the low business failure rate [in the mining sector], banks indicated in liaison that the performance of their resource-related loans had deteriorated somewhat. They also noted that the low level of interest rates could be masking underlying stress in this sector."In an overview written against the backdrop of elevated fears in financial markets over the debt load and strategy of Glencore, the RBA observed that "bank lending to the resource sector has increased rapidly in recent years [while] large resource producers have increased their issuance of debt into financial markets, especially offshore, even as they cut investment spending."The RBA said: "Higher debt and the steep fall in profits have resulted in a significant rise in the debt-servicing ratios of smaller resource producers [while] the aggregate debt-servicing ratio of listed mining services companies has also risen.
"Although the debt-servicing capacity of many of the smaller resource producers has been supported by strong liquidity positions to date, continued low commodity prices would erode these positions in time."Indeed, some smaller resource producers have come close to breaching debt covenants and a range of firms have had their credit ratings downgraded."Putting further pressure on their debt-servicing ability, resource-related companies may face difficulty rolling over their debt."