Subdued business credit conditions are the result of equal parts caution by companies and tighter supply, the RBA reports in the latest Statement on Monetary Policy.

Many businesses have repaid lines of credit they drew down early in the pandemic. Demand for business credit has been subdued since then and, as a result, total credit growth has declined, the RBA said.

However, the size of available credit facilities has increased significantly since the start of the pandemic, suggesting that businesses are continuing to take a cautious approach to managing their access to liquidity.

The volume of lending to SMEs has remained little changed over this time, with a pick-up in lending to the agriculture sector offset by a decline in lending to other services.

Demand for new loans is subdued despite low interest rates. Since April, commitments to new business loans have fallen to levels well below those seen before the pandemic, although they have stabilised in recent months.

“Liaison with businesses and banks suggests that businesses have been reluctant to take on debt given the uncertainty about the economic outlook,” the RBA said.

Businesses have also made use of a range of temporary government and loan payment deferral initiatives, which have helped build up liquidity buffers and lessened the need for new loans.

Around 65 per cent of large businesses surveyed by the Australian Bureau of Statistics in October reported that they had enough cash to cover their expenses for at least six months, up from 50 per cent in June.

In both June and October, over 35 per cent of small businesses surveyed by the ABS reported that they had enough cash for at least six months.

Take-up of the government’s $40 billion SME loan guarantee scheme has been low, with about $3 billion of loan commitments made to around 30,000 businesses under the scheme.

“The availability of funding at low cost through the scheme will help support new lending should the demand from businesses pick up,” the RBA said.

At the end of December, just over 1 per cent of all small business loan still had a loan repayment deferral in place, down from a peak of 20 per cent in June.

Supply has tightened. Banks have reported in liaison that much of the tightening has reflected the application of existing lending standards in a weaker economic environment.

“In addition, banks have required a greater degree of verification of borrowers’ information to better understand whether it is reasonable to extend a loan,” the RBA said.

Some banks continue to be cautious about lending to particular sectors, such as tourism, retail and commercial property, and to customers new to the bank.

Surveys of small business indicate that access to finance became less difficult in the latter months of 2020. But at the same time fewer business reported that they have tried to access finance.