A change to bank capital adequacy rules this year, which reduced the risk weighting on SME loans, does not appear to have had any impact on the volume of SME lending by banks. In January, a reduction in APRA’s capital requirement for banks’ SME loans took effect, as part of wider changes to capital adequacy rules. The change lowered the risk weighting on loans to SMEs, reducing the amount of capital banks are required to hold against these loans. The lower capital requirement reduced the cost to banks of funding SME loans and could support increased lending to small business. The Reserve Bank reported in the latest Reserve Bank Bulletin that lending to SMEs increased by 6 per cent over the past year but this was driven entirely by lending to medium businesses.  The level of outstanding lending of small businesses has changed little over the past decade. In July, the RBA convened its regular Small Business Financial Advisory Panel. It was the same old story: small businesses find it hard to access finance on terms that suit their needs. In many cases, the issue is the business owner’s unwillingness to use their residential property as collateral. Another issue is the time taken to process applications. This has become more onerous as interest rates have risen and the economy has slowed. Banks have reported being more cautious about lending to SME businesses in sectors exposed to the slowing economy. While growth in non-bank SME lending has provided business with alternative sources of finance, the RBA said the amount of funding obtained through these sources remains modest compared with bank lending.  While supply is more constrained, demand is also down. Panellists reported that their appetite for new finance was weaker than in the prior year. Some were seeking working capital facilities for general operational uses or to pay for new equipment, but few were seeking finance for growth. On the movement in rates, the RBA said the average variable rate on new loans to SMEs has risen by around 360 basis points since the start of monetary policy tightening in May last year. This is lower than the 400 bps increase in the cash rate and the increase in rates for larger businesses. In June, the average outstanding rate for an SME was around 65 bps higher than for a large business. This is well below the average spread of 150 bps over the past decade. This historically low spread reflects the fact that a higher share of SME credit was fixed at low rates during the pandemic, and some of these loans are yet to roll off onto higher rates. Around one-third of small business credit is currently fixed.