INDY Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, October 30, 1997

• 0910

[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): I'm going to call the meeting to order today. Pursuant to Standing Order 108(2), a study of small business access to capital and bank loans is our order today.

We have before us witnesses from the Canadian Bankers' Association, and perhaps it would be best if I invite Mr. Shaughnessy to introduce the people who are with him. But before I do that I just want to give a brief outline of what's happening.

We're going to have a presentation from Mr. Shaughnessy and Mr. McCallum on credit statistics and following that we'll have questions. That shall go for about an hour. We'll then go into the analysis of the Lightstone survey, with a presentation, followed again by questions.

Mr. Shaughnessy.

Mr. Kelly Shaughnessy (Senior Vice-President, Small Business Banking, CIBC; Canadian Bankers' Association): Good morning, Madam Chair and members of the committee. Thank you for the opportunity to meet with you today to discuss the relationship between Canada's banks and our nation's small business community.

Joining me today are representatives of the six other major Canadian banks, bankers who are responsible for their banks' services to small business. Perhaps at this time my fellow bankers could introduce themselves.

Mr. William McLaney (Vice-President, Credit, Hongkong Bank of Canada; Canadian Bankers' Association): Bill McLaney. I'm with Hongkong Bank of Canada.

Ms. Lynda Brochu (Vice-President, Small and Medium Sized Enterprises, Bank of Montreal; Canadian Banker's Association): Lynda Brochu. I'm with the Bank of Montreal.

Ms. Anne Sutherland (Senior Vice-President, Small and Medium Sized Enterprises, Royal Bank; Canadian Bankers' Association): Anne Sutherland, Royal Bank.

Mr. John Leckie (Senior Vice-President, Business Banking Services, Toronto Dominion Bank; Canadian Bankers' Association): John Leckie, Toronto Dominion Bank.

Mr. Dieter Jentsch (Senior Vice-President, Canadian Commercial Banking, Bank of Nova Scotia; Canadian Bankers' Association): Dieter Jentsch, Bank of Nova Scotia.

Mr. Jean Pierre Guindon (Manager, Corporate Credit Services, National Bank of Canada; Canadian Bankers' Association): Jean Pierre Guindon, National Bank.

Mr. Kelly Shaughnessy: We look forward to working with your committee in the months and years ahead to accomplish an objective we all share, helping Canadian small business to grow and prosper.

Today we would like to briefly present the results of our latest survey of small and medium-sized businesses. Ian Lightstone of Thompson Lightstone & Company will be discussing these results with you later this morning.

Right now I would like to take a moment to table our latest statistics on bank lending to small and medium-sized business. A summary of the data to date indicates the amount of credit authorized to small and medium-sized enterprises in Canada grew by 2.7% from the first quarter of 1996 to the first quarter of 1997. This increase is comparable to the growth in the economy as a whole for the same period.

The banks have authorized over $66 billion in credit to small and medium-sized enterprises, of which over $45 million is outstanding. For the purposes of our work with this committee it has been agreed that SMEs are businesses with credit authorizations of less than $1 million.

The number of small and medium-sized business customers who borrow from the banks increased by 2.1% over the past year. There are now almost 704,000 small and medium-sized businesses borrowing from the banks. Small and medium-sized businesses account for 95% of the business borrowing customers of the banks.

Small business is big business for the banks, and each one of us around the table is committed to ensuring that we provide quality service to this core group of companies.

The statistics I have presented today are important because they allow public policymakers, such as yourselves, to monitor bank lending to small businesses, but these numbers provide only half the story.

The Conference Board of Canada has done a study entitled “What's New in Debt Financing for Small and Medium-Sized Enterprises”, which estimates that domestic banks provide 50% of the total debt financing to SMEs in Canada. Banks not only compete with one another for small business customers, they also compete with credit unions, caisse populaires, government lending agencies, and leasing companies. This competition is fierce. It is healthy and it is good for small businesses. In fact, a recent study by Statistics Canada shows the firms most likely to succeed are those with a variety of financing sources.

• 0915

We need more than statistics produced by the banks to get the full story of whether the financing needs of small business are being met. For example, if bank lending to small businesses decreases, does that mean small businesses are not getting the financing they need? Not necessarily. It may be that small businesses are getting the financing they need from other sources, such as leasing companies like Newcourt Credit or credit unions or caisse-populaires. With strong competition in the marketplace, all lenders are working to steal market share from one another. It may also mean the economy is improving, which allows small businesses to rely on retained earnings or supplier credit rather than applying for more bank debt.

The banks have appreciated the opportunity to work with this committee over the past few years to ensure we are providing the information needed to hold our industry accountable for our level of support to small businesses. We look forward to continuing our dialogue with you. However, without a complete set of data from all sources of small business financing, it is not possible to understand fully whether the needs of small businesses are being met. We would encourage the government to open discussions with all sources of financing, including both equity and debt providers, to ensure small businesses in this country are getting the financing they need to grow and prosper.

Madam Chair, John McCallum has just joined us. He is chief economist at the Royal Bank.

Very good timing, John.

He's here to provide some brief comments on how the state of the economy affects the demand for credit. I will ask Mr. McCallum to make some brief comments on the issue and then the bankers around the table would be more than pleased to answer your questions on the current levels of lending to small businesses.

John.

Mr. John McCallum (Senior Vice-President and Chief Economist, Royal Bank; Canadian Bankers' Association): Thank you. I guess that was good timing.

Good morning, Madam Chair, committee members. It's a pleasure for me to be here.

I hope you have had this document with my name on it, “Canadian Credit Markets”, distributed, because I will speaking to that. I know you don't like long speeches from economists, so I will definitely limit myself to five minutes.

What I've been asked to do is to give you a brief macro-overview of credit in Canada. I guess a good place to begin is with this table you have, showing the statistics for credit.

Total credit extended in Canada as of June 1997 is $1 trillion and $98 billion. It took me a while to get my head around a number that big. It's not $1 billion, it's $1,098 billion. We start with that and we look and we see it's grown this year to date by 6.4%.

I would like to make two points about that. First, ultimately it's the Bank of Canada or the central bank that determines overall growth in credit. If you ask yourself if it's too fast or too slow, I would say 6.4% is about right. It's a sort of goldilocks thing. You don't want it too fast, you don't want it too slow; you want it just right. If it's too slow, you starve people of credit. If it's too fast, you get into terrible problems such as real estate bubbles, and ultimately everybody loses from that. We in Canada experienced that in the 1990s. Japan experienced it with a vengeance and is still suffering from it. Thailand, Malaysia, and others are suffering from it as we speak. So you want a moderate growth of credit, not too fast, not too slow.

If you look next to the components of credit—and I should say also, banks account for just under half of that $1 trillion; just under half of total credit. Total credit breaks down into two parts, households and business. Let me begin with households.

Households are important. They are the people, if you like. Economically, household consumer spending counts for about 60% of our GDP. We have $500 billion in household credit, of which banks are $300 billion. The bank component has been growing by 9.6% over the past year to June, the total by 5.7%.

You further break household credit down into consumer credit, which is personal loans and credit cards, and that is $135 billion, or $94 billion by banks. The largest part of it is residential mortgages of $365 billion, of which $200 billion is banks. Banks have been growing mortgages by about 9%.

• 0920

What determines growth in consumer credit? Basically, it's growth in consumer spending, which itself depends on income growth and interest rates.

Are consumers in Canada too much in debt? Debt is very high relative to income, as our charts show, but the burden of servicing that debt is not particularly high because interest rates are low.

Residential mortgages, what determines that? Well, basically it follows residential construction, which itself is determined by interest rates, consumer incomes, and so on.

Let me now turn to business. In the total picture, business credit is 60% of the total, $600 billion, of which banks extend somewhat less than half, $230 billion.

Business credit is itself broken down into three parts: long-term credit, bonds, and equities. This has been growing at 8.5%. Banks are not very big in terms of extending long-term credit, and never have been. That's because most of the banks' liabilities to deposits are on the short term, whereas the liabilities of insurance companies and pension funds and mutual funds can be for the longer term. So most of the long-term credit, new bond and equity issues, does not come from banks.

Other long-term leases and mortgages come in part, but not primarily, from banks. Again, this is partly due to the medium length of the liability and partly also to regulatory issues, since banks are not permitted free rein in the leasing market.

Finally, we come to short-term credit. This is the traditional area in which banks are important. You can see that for the year to date, short-term credit has been growing by 5.8%, and the part extended by banks is at 6.6%, which is not out of line with the growth of total credit in the economy.

Short-term credit is really to finance working capital or inventories. As you can see from the chart, short-term credit moves very closely with inventory accumulation.

If you're interested in credit extended to business, you look at these three components of credit to business, but you also look at households. A lot of the credit that's classified as household, directly or indirectly, goes to business, either because an individual borrows in his or her own name and uses the money in their business or because consumer credit indirectly supports businesses, for example, through housing construction.

This is the last point I'll make. I won't make it in any detail because I think I should stop talking now.

There's a sad story at the end of my charts about what we call the funding gap. I don't want to bring tears to your eyes, but banks have been suffering from a drop in personal deposits. They have had to rely, because a lot of these personal deposits have shifted to mutual funds, increasingly on higher-cost wholesale funding to finance credit rather than the traditional source of deposits.

So this is just one indication of ongoing changes within our financial system.

I'll stop there, Madam Chair. My purpose was to try to give you a broad overview of credit, its growth, and its components.

The Chair: Thank you, Mr. McCallum. Thank you, Mr. Shaughnessy.

We have a number of members who wish to ask questions. We'll begin with Mr. Schmidt.

Mr. Werner Schmidt (Kelowna, Ref.): Thank you, gentlemen and ladies, for appearing this morning. It's nice to see you at least once in a quarter. Mr. McCallum, it's a real honour to have you here.

I would like to start by referring to your chart number 2, which has to do with consumer credit and consumer spending. There's a graph that indicates that consumer credit is rising and that the spending on consumer durables and semi-durables is rising at a slower rate than the actual debt burden of the consumer.

• 0925

Does this suggest to you that the consumers are spending their money on non-durable items, in other words, perishable items or things that really don't support a good debt position?

Mr. John McCallum: You're absolutely right. The credit is growing faster than the spending. The credit is the solid line in the graph. You can also see in chart 1 that the ratio of household debt to income is going up. That suggests that consumers are indeed borrowing to finance a part of the increase in consumption.

Spending on consumer durables and semi-durables in recent quarters has in fact gone up faster than spending on non-durables. That's typical. When interest rates come down, there's a big increase in spending on big ticket items, whereas spending on more normal things like food doesn't vary so much.

So in fact the most rapidly growing component of consumer spending in recent times has been the durables.

Mr. Werner Schmidt: Madam Chair, if I may just follow that up, then, in the next quarter would we see those two lines in your graph coming closer together?

Mr. John McCallum: I don't know, to tell you the truth. I think what we're going to see is continuing strong growth in spending on consumer durables and semi-durables because we're going to have continuing low interest rates and because we have improving consumer confidence. We're going to see a moderate increase in consumer credit as well. As to exactly which one will grow faster, I'm not sure. If I had to guess, I'd say the lines will come somewhat closer together.

Mr. Werner Schmidt: I think there are some really serious economic implications of what the chief economist has just observed for our benefit here. I think it would be very interesting for us and the Bank of Canada to look at this very interesting development. It's very significant.

I'd like now to turn to the banks, if I may. It has to do with the study, I think, that you gave us, “Listening, Understanding, Improving, Partnering”. On page 7, I believe, there's a paragraph about the need to communicate more effectively with small business when a particular loan application is turned down. I'm just wondering what mechanisms the various banks have instituted to make that particular thing a reality.

Mr. Kelly Shaughnessy: Maybe I can answer your question, Mr. Schmidt, from an all-bank point of view. Each of the banks has a code of conduct in place for small businesses. It is based upon an industry code as a foundation. The CBA came up with a code of conduct for the banks, which is the foundation document, and then each and every one of the banks has built from that document and supplemented it.

In that code of conduct, there is an obligation on the part of the bank when a loan request is turned down to provide the loan applicant with alternate sources of financing. Our account managers seem to think they're doing it, but if you look at the survey that Mr. Lightstone will present later this morning, some of the customers are saying this is not happening. We have to increase our communication with our account managers to make sure that what they're saying is clearly understood by the customers too.

Mr. Werner Schmidt: Okay. So what you're really saying is that there has been no change in the mechanism from what was there as a code of ethics, and that's pretty well where it stands at the moment.

Mr. Kelly Shaughnessy: No. The code of conduct was put in place as recently, I think, as the last 18 months, so there is a significant change. The code of conduct is new to the banking industry. It was part of the work done with this committee to put it in place.

What I'm saying is that we have to make sure it is being adhered to by all of our account managers across the country. It's a relatively new document so obviously there are some growing pains, but certainly it's a matter of policy at all the banks that this information be provided to potential borrowers.

Mr. Werner Schmidt: Thank you.

Do I have time for another question?

The Chair: No. Thank you, Mr. Schmidt.

• 0930

Mr. Bellemare.

[Translation]

Mr. Eugène Bellemare (Carleton—Gloucester, Lib.): How do you define a small business? Is it by the number of employees? Is it by the amount of money it tries to borrow? Or is it by the company's sales?

[English]

Mr. Kelly Shaughnessy: Perhaps once again I can answer your question in the context of an industry-wide definition for use at this committee level. For that, and specifically for the lending statistics that have just been tabled with the committee, it was agreed with this committee that we'd use a definition of authorized credits of $1 million or less.

Having said that, we view small business as a customer segment, and virtually every bank probably has a different definition of small business. If you wish, we could have our members define small business from their point of view for you, from a customer segment point of view.

Mr. Eugène Bellemare: Do you keep records of how many applications were refused? I don't mean the written application where it's signed and delivered. I'm including the number of small businesses that come in and say, “I would like to borrow; I do business with this bank”, and you go through their net worth, their expenses and so on, and then you say, “I don't think we'd lend to you. It's not worth making the request.”

Mr. Kelly Shaughnessy: One of the difficulties in doing that is what constitutes an application for credit. As you said, sir, it may almost be an informal discussion that a client can have with an account manager about the possibility of borrowing.

That is one of the reasons why the banks and the committee agreed two years ago to have the Thompson Lightstone survey done. In the survey that Mr. Lightstone will present later this morning, it is in the eyes of the client who's determining whether or not an application has been made, not in the eyes of the bank. So that is one of the reasons why we asked Mr. Lightstone to do the survey in 1996 and in 1997. It is the client who is deciding whether an application has been made, not the bank.

[Translation]

Mr. Eugène Bellemare: Have you noted that a number of small businesses gave up trying to borrow from you? Did you take note of that? What are you doing to correct the situation?

I will add something else. In our constituency offices we often hear that many small businesses had to mortgage their private property in order to obtain loans. They had to provide personal property as collateral. Do you keep statistics on the fact that people have to secure their loans with personal property?

[English]

Mr. Kelly Shaughnessy: Once again, in Mr. Lightstone's presentation later on this morning he will have statistics available on the percentage of times the small business client has had to provide a personal guarantee and the percentage of times the small business client has had to pledge personal assets. That will be covered off in the Thompson Lightstone survey presentation later this morning, so we do have that information, sir.

• 0935

Mr. Eugène Bellemare: For the breakdown by cities, you give figures—and they're national figures—that say you've lent a lot of money and that we should applaud, but there's a moment where we should have a moment of silence because less people are depositing in your bank.

We wonder if all the loans are being made in certain centres—Toronto, for example, or Calgary—and whether or not the business people in my city, Gloucester, may be getting much less proportionately when compared to the bigger cities. Do you keep track of that?

Mr. Kelly Shaughnessy: What we've agreed to do with the industry committee is to report these statistics in nine different geographic categories. We found that if we drilled down deeper than that, we would be breaking the confidentiality agreement, so we've based that upon the StatsCan level of confidentiality, and we wouldn't be getting a big enough sample size.

In your own case—

Mr. Eugène Bellemare: I don't want you to break them down to the size of a parish. For a city of 100,000, though, it's very confidential unless there's only business in the city.

Mr. Kelly Shaughnessy: When you look at the statistics that we report, because of the matrix of statistics that the committee has asked us to provide, it is broken down geographically, it is broken down by industry, and then it is broken down by size of authorized credit, too.

Mr. Eugène Bellemare: And what exactly does “geographically” mean?

Mr. Kelly Shaughnessy: In the case of, for instance, the member for Gloucester, it would be broken down by Ontario east and north, Madam Chair. For instance, in the province of Ontario, the statistics are reported as metropolitan Toronto, southwestern Ontario, and Ontario east and north. We then divide it down by industry after that, and we also divide it down in a matrix of authorized credit, going down as low as $25,000.

Mr. Eugène Bellemare: So in an area like Ottawa, in the national capital region, most of the money could be going to the high-tech people in the west end, with absolutely nothing in the east end.

Mr. Kelly Shaughnessy: As I said, it's broken down by industry and broken down by authorized credit. In an area like the nation's capital, you would be able to spot it if the banks were only lending to one industry.

Mr. Eugène Bellemare: Thank you.

The Chair: Madame Lalonde.

[Translation]

Mrs. Francine Lalonde (Mercier, BQ): Good morning. Thank you for your presentation. Mr. Shaughnessy, you said in your brief introduction that there has been a 2.7 percent increase in the credit that banks have approved for SMEs in Canada, and that this is comparable to the rate of growth in the economy. Although this may be an interesting parallel, it seems to me that it does not really correspond the transformation of what I call the labour market and to what has happened in the small business sector.

If we look at what is happening, we see that, fortunately, an increasing number of self-employed people are setting up their own small businesses. I recognize that your figures do not distinguish between SMEs with x number of employees and individuals who are starting businesses that might eventually hire from one to three employees.

There has been an almost revolutionary transformation in this field, but the figure that you mentioned concerning the increased rate of borrowing by SMEs from banks, namely, 2.1 percent, fails reflect this transformation. It would seem to me that if many self- employed people are starting businesses, then there should logically be many more people needing loans.

Consequently, I would say that you are not meeting the demand. I am saying this to you bluntly, even though I understand, since the bible already said that loans are only for the rich. This is my first question.

• 0940

Mr. Shaughnessy said it, but Mr. McCallum could also answer. It is up to you.

[English]

Mr. Kelly Shaughnessy: With your permission, Madam Chair, maybe Mr. McCallum can answer what relates to the 7% and I could answer the question about what type of borrower we lend money to.

[Translation]

Mr. John McCallum: I just wanted to say one thing. I agree with you that the number of self-employed people has increased very significantly. However, if you asked me whether they have access to sufficient credit, I could not answer you with certainty. What I could say is that many of them probably have access to general consumer credit. So, they do not have access only to what is listed as business loans.

If you review my figures, you will note that from June 1996 to June 1997, bank loans to consumers increased by only a low 5 percent. So, it is a combination—and I do not know the proportion—of consumer loans and business loans. We do not know the share each represents. Perhaps the banks have more information.

Mrs. Francine Lalonde: It would seem to me important that the committee have a good understanding of this. This brings me to a sub-question that you may address in your statement.

Following pressure from this committee, an instrument was created called the Small Business Loan Act, SBLA; it provides for loans guaranteed by the government. Do you have statistics on the number of loans made to SMEs without guarantees and the number of guaranteed loans?

In constituency offices, we hear horror stories. People are telling us that it is getting harder and harder to get a loan, that they have to commit their houses and every thing they own as collateral. They are rather discouraged.

I discussed the article on the Conference Board's research with people, the article that says there are more and more "leasing companies"—I don't know the correct French term—and that they provide a lot of credit. I was told that since people had trouble getting bank loans they were obliged to go to leasing companies, but that this was not their first choice.

I think that this provides a very good indicator of whether you are progressing quickly enough.

[English]

Mr. Kelly Shaughnessy: Once again, if I may answer on behalf of the banks, Madam Chair, the growth we're seeing in leasing companies and other finance companies in providing finance to small business is clearly articulated in that Conference Board study, where the banks are providing only 50% of the financing to small business. I do not believe that is an indication of the banks' unwillingness to finance small business. I believe that is an indication of the intense competition in financing small businesses. If you take as an example a small business that phones up a well-known computer company that sells its computers by the telephone, as they are inputting the information for that order into the order desk, they are also generating an offer to lease by one of the best-known leasing companies in North America today.

So I don't believe it's an unwillingness. I'm telling you the competition is out there, it is ferocious competition, and an awful lot of it is coming from leasing companies, such as the Newcourts of the world, the GT Capitals of the world, the AT&Ts. They are doing a very, very good job and they are, frankly, taking market share.

The Chair: Mr. Peric.

Mr. Janko Peric (Cambridge, Lib.): Madam Chair, I just want to continue on Madam Lalonde's question.

• 0945

Why would the applicant or a small business person go to a leasing company? If you're so efficient and if you admit there's high competition, why wouldn't you accept them in the first place instead of turning them over to a leasing company?

Mr. Kelly Shaughnessy: First, in the overwhelming number of cases they are not going to the leasing company as a second choice. They're going to the leasing company and the leasing company is making the credit available as part of the package of selling the product. So if a company is selling computers, or widget makers, very frequently, financing of that product is now quite common.

The second reason they may be leasing is it might be fiscally advantageous as there might be tax advantages for the small business to lease its capital equipment as opposed to buying it on debt financing.

Mr. Janko Peric: I believe all banks treat all their customers equally. You do.

Mr. Kelly Shaughnessy: If you're asking whether we discriminate against customers, the answer is no.

Mr. Janko Peric: Your study indicates that a woman business owner is more likely to be asked to provide security, collateral, property, or even a signature from her spouse than a man. Is that true?

Mr. Kelly Shaughnessy: Once again, that is covered in the Thompson Lightstone presentation. Without speaking on Mr. Lightstone's behalf, this statistic is consistent with the Thompson Lightstone surveys of 1996 and 1997. When Mr. Lightstone and his colleagues did the cross-tabbing down through the industry and the size of the business and the age of the business, they found there was no gender-based discrimination. The reasons for the higher incidence were the type of the business, the age of the business, and the size of the business.

Mr. Janko Peric: Does that apply to all banks?

Mr. Kelly Shaughnessy: I will let Ms. Sutherland talk to that.

Ms. Anne Sutherland: I would just like to mention that in Mr. Lightstone's presentation he has information for the industry as a whole as well as differences found per organization. I think you'll find it's fairly consistent.

Mr. Janko Peric: Are you willing to take a little higher risk to support small and medium-sized businesses?

Mr. Kelly Shaughnessy: I think you have to define what higher risk means. The banks are not high-risk lenders. We are not equity lenders. The banks' track record in risk management affects our ability to raise capital and our ability to raise deposits in the marketplace.

Most of the money we lend is from depositors or from the wholesale fund market, and they will not give the banks their deposits and wholesale funds if the bank is a high-risk lender.

In part of the business credit statistics that have been provided by the banks it lists the banks' loan loss experience. The last one we have is for fiscal 1996, and we also provided this committee with loan loss statistics for fiscal 1995. I think you'll find the rate of loan losses for small business loans is over the rate for the banks as a whole. So we do incur higher loan losses in the small business portfolio than in the whole portfolio of bank lending.

The Chair: Thank you, Mr. Peric.

I just want to remind the committee members that the first part is designated to the business credit statistics—and we only have Mr. McCallum with us for a short time—so please direct your questions to that. If your questions don't pertain to that, you can wait until after the Lightstone survey is presented.

Mr. Schmidt.

Mr. Werner Schmidt: My question has to do with the chart I referred to earlier, Mr. McCallum. What are the implications for small business and the direction of small business and small business lending given the apparent shift in the trend of consumer spending? It seems to me there could be a direct relationship to the retail market, especially in the durable goods sector of the retail market, and also the wholesale manufacturing and distribution. Could you perhaps say something about that?

• 0950

Mr. John McCallum: That's absolutely correct. The health of the consumer is intimately related to the health of the retailer in small business. We believe the Canadian economy in the next couple of years can look forward to good, solid expansion, probably the highest growth rate of the G-7, and the locomotive of that growth will be the Canadian consumer and the Canadian firm with its capital spending. No longer will we just be getting dragged along on the coattails of the U.S. economy.

I think largely because of these very low interest rates we have, which I think will remain low, the Canadian consumer is going to be spending a lot more money, and indeed already is doing so. I think that is going to be very healthy for the retail sector and for small business in general. It's not that every small business and every retailer will do well, but the economy as a whole will certainly become healthier, in my view, and many jobs will be created over the coming two years.

Mr. Werner Schmidt: The follow-up question is then obvious. What will this do to the granting of credit by the banks to the expansion of this particular sector of our economy? A large part of it is going to be small business. Does this mean the rate will increase for small business lending vis-à-vis large business lending in terms of credit expansion on a rate basis?

Mr. John McCallum: I think the banks will go where the credit demand is. When I say I think the growth will be x, I don't have a breakdown—

Mr. Werner Schmidt: I understand.

Mr. John McCallum: —between how much of that is small business and how much of that is large business, but I think we're going to have a generally expanding economy and bank credit will grow in line with that expansion. Certainly, that's what our forecasts call for.

Mr. Werner Schmidt: Thank you.

Mr. Jim Pankiw (Saskatoon—Humboldt, Ref.): My question is more specific, so I can defer if someone has questions on the larger picture for Mr. McCallum before he goes.

The Chair: Does anyone have a question directed to Mr. McCallum?

Ms. Brown.

Ms. Bonnie Brown (Oakville, Lib.): Welcome, Mr. McCallum. This is your first visit with us, and we're very happy to have you.

Going back to your charts, I can't find anything in it that's particularly startling, except chart 7, and I don't want to go away with any wrong impressions.

You yourself alluded to the fact that maybe it wasn't particularly good news. Could you explain to us the implications for the future if this trend continues, where the bank's personal deposits seem to be going one way and the bank credit extensions seem to be going the other? If in fact this is bad news, what might help, say in the way of public policy, to bring those two lines closer together?

Mr. John McCallum: Thank you very much for the question. It is a pleasure for me to be here. I'm not sure I said that, but it's my first time at the industry committee and I'm delighted to be here.

I said it was a sad story for the banks somewhat facetiously, but it's also a matter of some importance that what we've seen is an explosion in people's purchases of mutual funds. You see that in the previous chart, number 6. That has been partly because of people holding less bonds or stocks directly, but in more recent months it has also been financed by running down deposits. So for the first time in a long time banks have had an absolute drop in their deposits.

How can we finance all these mortgages and small businesses and everything else if our deposits drop? Usually we finance a lot of our loans through deposits. The answer is that we would have to go to the wholesale market and borrow. That is more expensive, and it also means that those who are getting the money that the banks used to get—the deposits we're losing—will themselves perhaps become more active players in the future in lending.

The second point is that this hasn't really hurt the banking system too much as a whole yet. The reason is—if you look at chart 8—that business deposits have been growing really quickly. Businesses are highly liquid. A lot of businesses are highly profitable these days, so business deposits have been growing, and to a certain degree that has been offsetting the drop in personal deposits.

• 0955

I have one last point. We've seen all this turbulence in markets, haven't we? We don't know whether this drop in deposits will continue. I tend to think there will be some flow back into deposits, a modest one. But I don't see deposits just dropping forever, particularly if people get a little bit nervous about the markets. There might be a return of some money to safer havens and away from the turbulence of the stock market. To the extent that were to happen, we might see an increase in deposits.

Ms. Bonnie Brown: That was the point I was getting to, this volatility in the markets we've experienced, particularly this week. Several commentators on television—you may have even been one, I'm not sure—suggested that part of the problem in the Far East is their lack of banking expertise, their lack of public policy; that is, regulations around banking. They're saying this is one of the fundamentals that isn't in place in order to have a healthy and sustainable market.

I've been concerned from the point of view that there has been a public debate of late around things like the Canada Pension Plan vis-à-vis RRSPs, I think much of which is invested in mutual funds. I'm personally worried about the security of Canadians, and you are furthering my concern by suggesting that so many more people are getting involved in the stock market and in RRSPs that more and more of their wealth is in these high-risk places. If in fact all their retirement funds are in there, what do you think the government should do to try to keep this balance of having a public pension system while at the same time encouraging people to invest because we know it's good for business? On the other hand, I think this has, as I said, a larger public policy implication. What do you think about this whole pension business if in fact—

Mr. John McCallum: Your question has a number of parts. Briefly, on the very first part, I think you're absolutely right in saying that the problems in Asia in many cases have to do with poor banking systems. This is what I said at the beginning of my remarks about how credit growth can be too high. When that happens, a lot of the money often gets into real estate, and then you get this bubble that bursts and you have overbuilding and troubles. Certainly, you have that in Thailand and Malaysia, and one of the biggest problems in emerging markets that makes their crises worse is poorly managed banks and excessive credit growth. So I agree with you on that point.

On the question of the security of Canadian savings, I think if you're talking about registered pension plans—and I happen to sit on the Royal Bank's committee—typically you have about 50% of the money in bonds and 50% of the money in stocks. Stocks tend to give you a higher yield over long periods of time, but they're more volatile. So the more conservative you are, the more you put in bonds and the less you put in stocks.

I think in terms of Canadians' private savings in RRSPs, it depends very much on the time horizon. If you're 20 years old and you're saving for your retirement, you'd probably be better off in stocks, because over a long period of time stocks are going to do well—unless you think the whole economy's going to crash, which I think is most unlikely. I think if you have a long time horizon you're better off with a higher proportion in stocks. If you're an older person, the market might crash just when you need the money, so you're better off in a safer instrument. So I think it would depend very much on the individual in question.

As far as the Canada Pension Plan is concerned, I think it's an excellent idea to move away from subsidized lending to the provinces, which gives a very low return on the savings of Canadians, to more market-based instruments, some combination of bonds and stocks.

I hope I've answered your question. I'm not sure if I have fully.

The Chair: Thank you, Ms. Brown. Thank you, Mr. McCallum.

Mr. Shepherd, briefly, please.

• 1000

Mr. Alex Shepherd (Durham, Lib.): Mr. McCallum, maybe you can assist me. I have financial statements here of the Royal Bank, the Canadian Imperial Bank of Commerce, and in fact most of the banks. You talked about deposits. These banks from 1994 to 1996 show increases in their deposits of something like 10%. So it's only a current phenomenon that you're talking about a rundown on....

Mr. John McCallum: Correct.

Mr. Alex Shepherd: Isn't that more related to the fact that the banks are paying such low interest rates on people's deposits? Isn't it supply and demand?

Mr. John McCallum: I think if the banks paid higher interest rates probably we'd have more deposits, yes. But we traditionally haven't paid very high interest rates on certain kinds of deposits. It's only recently, I think with the availability of mutual funds, that people have shifted from deposits to mutual funds. So I'm not asking for your sympathy on this matter, I was just stating it as a fact.

Mr. Alex Shepherd: I would like to inject something else I'm trying to reconcile here. In the category...most of the financial statements take business and government loans and lump them together. But even so, for instance, the Bank of Commerce from 1994 to 1996 shows an 18% reduction in lending to both business and governments. Similarly, the Royal Bank from 1995 to 1996 shows a 2.4% reduction in lending to both business.... This is domestic lending. How do I reconcile that with your figures saying there's an expansion in lending to—

Mr. John McCallum: I think if you look at my chart 5, the heavy line shows short-term business credit from 1971 to today. It typically goes down during recessions and up during expansions. So in the early nineties it went down because we had a recession. It was compounded by this over-lending in real estate, which the banks were not too smart to do. It also went down in the early eighties when there was a recession. But now we're in a period of expansion and you can see that line is turning up and there's quite rapid growth as of the last year. Certainly for parts of the nineties, when we had a recession and the economic weakness, that credit was going down.

Mr. Alex Shepherd: If you take a macro-model of the banks, isn't what's really happening a traumatic shift towards foreign lending?

Mr. John McCallum: No.

Mr. Alex Shepherd: All their financial statements show that their foreign lending has increased significantly, faster than the growth in the rate of the deposits.

Mr. John McCallum: I'd have to check those statistics.

Mr. Alex Shepherd: You have just given us a capsule of a domestic market.

Mr. John McCallum: Exactly. I was asked to speak to the credit in the domestic market. I don't have the statistics in my head as to domestic versus foreign. I could find that out for you, but I don't have it in my head.

Mr. Alex Shepherd: Some of these financial statements show they're very close. Both business and government loans in foreign denominations are approaching the same quantum as Canadian assets. We're loaning just as much to foreign businesses and governments as we are to Canadians.

Mr. John McCallum: It's certainly not true that we're loaning just as much. Are you talking about lending to foreigners or lending in foreign currencies? A lot of Canadian—

Mr. Alex Shepherd: This is how you want to look at these financial statements. There's also the question of derivatives, so that's another.... But they're all rated in foreign currencies.

Mr. John McCallum: If you're talking about lending in foreign currencies, there's a huge amount of lending to Canadians in foreign currencies, which is very different from lending to foreign people. I'm not sure which you're talking about.

Mr. Alex Shepherd: The Royal Bank has better financial statements so they categorize domestic lending to international. It shows the growth of their international lending between 1995 and 1996 to be up 32%. At the same time, their lending to business and government loans domestically in Canada is down 2.4%.

Mr. John McCallum: I think one would have to look at those numbers over a longer period of time. I'm sure the domestic lending is bigger than the foreign lending. In certain periods of Canadian weakness the domestic lending may go down, as I explained and as you saw on my chart 5, and in other periods of time, lending to foreigners may go down or up, depending on conditions.

• 1005

I could easily get you the information that shows you the time series on that topic, if you wish. I'll send it to you. I simply don't have it in my head.

Mr. Alex Shepherd: But the banks are telling us that's what they want to do; they want to go out and be players in the global marketplace. So wouldn't it be logical to think that their future financial statements are going to show more lending in foreign markets?

Mr. John McCallum: That may be. I think what's happening in the world at large...forget about banks for a moment and think in terms of trade. Trade—exports and imports—is growing faster than the economy. We're becoming more dependent on imports and exports are getting more important. The degree to which we cater to the domestic market as manufacturers or producers is getting to be less...we're getting more enmeshed, if you like, whether you like it or not, with the United States.

A higher fraction of what we sell is exported to the U.S. and a higher fraction of what we buy is imported from the U.S. It may be that this is also true as borders become less important in financial services. It may be—and I'm not saying this has happened—a trend of the future that we will have more financial services provided in Canada by foreign companies, like ING Bank or Wells Fargo. Similarly, Canadian banks may do more business outside of the country, in the U.S., let's say.

Just as exports and imports have become more important relative to GDP, it may be that financial institutions in general will become more international. But Canadians won't be worse served. In fact, this would lead to more competition. If foreign banks or financial institutions become more active in Canada, that'll give Canadians a broader range of choice.

I'm not saying this has happened—I'm offering to get you statistics, if you wish—but I think the trend of the future may be towards a greater internationalization in general in our lives.

The Chair: Thank you, Mr. Shepherd.

Mr. McCallum, I understood that you had a time commitment. Have we kept you past that?

Mr. John McCallum: Today seems to be my day in politics. I'm supposed to be speaking to the Ontario Liberal caucus in Picton, but if you wish me to stay longer....

Some hon. members: Oh, oh.

The Chair: I have a couple of brief questions.

A voice: He's trying to get out of it.

Some hon. members: Oh, oh.

Ms. Francine Lalonde: Madame—

The Chair: No, not right now, Madame Lalonde. I have another speaker first.

Mr. Lastewka had a question directed to you, so I'll allow Mr. Lastewka that brief question and then we're going to go to the Lightstone survey.

Mr. Walt Lastewka (St. Catharines, Lib.): I would like you to look at chart 3 and explain it for me. I was very surprised to see the amount of increase in the residential construction expenditures versus the residential mortgage credit. That seems to be much different from any past....

Mr. John McCallum: What is it that surprises you?

Mr. Walt Lastewka: It would seem to me that either people are borrowing less to buy residences because they have money and don't need to borrow or we're starting to build a lot in construction and we could get into another glut in construction. Am I reading that chart correctly or am I reading too much into it?

Mr. John McCallum: As a general rule, the increases in residential mortgage credit follow residential construction, but by no means perfectly. Some of that residential construction is for home improvements that might not require any mortgage and people's...I can't explain all of the deviations between the two lines. In general the two move together, but far from perfectly, because not all residential construction is associated with a mortgage.

Mr. Walt Lastewka: But that's the first time it's appeared in that manner, at almost 23% more than in the whole chart.

Mr. John McCallum: Back in 1982 it was like that. It is true. Again, I don't know why. I have a colleague who knows more about this than I do. I could easily try to get you an explanation if you're interested.

Mr. Walt Lastewka: Thank you.

The Chair: Madame Lalonde, is your question for Mr. McCallum specifically? I understood you wanted to go to the Lightstone survey. If it's directed to Mr. McCallum, because he has to leave, if you'd like to—

[Translation]

Mrs. Francine Lalonde: Yes, I do have questions about the Lightstone report, but I have been wanting to ask Mr. McCallum a question for some time.

• 1010

Mr. McCallum, I would like you to explain to us why there is no table that gives an overall picture of the banking system. Table 8 shows that business deposits have increased, and Table 7 reveals a decrease in personal deposits. What is the big picture? What is the relationship? Do you understand my question?

Mr. John McCallum: Yes.

Mrs. Francine Lalonde: There may be much larger deposits that make up the difference. I would like to know what is the overall situation, and that brings me to my second question.

You have expressed your confidence in the growth of the economy. In periods of growth, SMEs are particularly vulnerable because they need capital. We know that a lot of small businesses fail to grow because they are short of capital, and this seems to be particularly true in the high-tech field, which is more capital intensive.

Can we be assured that the banks will be able to meet the demand at times of growth, on the basis of your hypothesis?

Mr. John McCallum: Small businesses are always vulnerable.

Mrs. Francine Lalonde: Yes.

Mr. John McCallum: There are always shocks, surprises and problems.

Mrs. Francine Lalonde: Yes.

Mr. John McCallum: That is life. But I would also say that these businesses are less vulnerable in periods of growth than in recessions. In growth periods, there is at least a demand for their products. They are better off in periods of growth than during the opposite.

You were also asking whether the banks would be there. I would say, yes. Our forecasts indicate that there will be a considerable expansion of credit, although we do not distinguish between big business and small business.

Mrs. Francine Lalonde: You do not. I said that it would be useful to have a table showing the overall situation of the banks. We can see that business deposits are growing, but we do not know if this represents big or small business, and we can also observe that personal deposits are decreasing. What is the overall effect?

Mr. John McCallum: I do not have the figures here, but I believe that the total of all deposits has not dropped to date. These two tables were intended to show that there might eventually be a problem if personal deposits remained low and continued to fall and if business current accounts ceased to grow. I do not think that there is a problem at the present time, although the banks rely less on their deposits than they used to. The overall proportion of loans funded by deposits is much lower than it used to be.

Mrs. Francine Lalonde: It would be useful to have some tables on this to help us to see the big picture.

Mr. John McCallum: Certainly, I shall send you a copy of such a table.

Mrs. Francine Lalonde: Thank you.

[English]

The Chair: Thank you.

We're going to move on to the Lightstone survey now. We will resume questions again after that. The questions after the survey can be about anything we've discussed today. They won't be limited to what Mr. Lightstone is presenting. The representatives from the different banks are staying, with the exception of Mr. McCallum, who I understand has another commitment.

Mr. John McCallum: Thank you, Madam Chair, and goodbye.

The Chair: Thank you.

Mr. Lightstone.

Mr. Ian M. Lightstone (Director, Thompson Lightstone & Company Limited): Madam Chair, thank you very much for the opportunity to meet with you today and to present.

• 1015

What I want to do today is to present an overview of the key findings from the study we recently conducted for the Canadian Bankers' Association. I believe everyone has a copy of the full report, so I will not be going into all the details presented in the study. I'm going to try to present some of the key areas relating to loan approvals, customer satisfaction, etc. Many of the detailed findings are in your separate reports, which have been distributed under separate cover. Also, I understand you have a copy of each of the slides or charts I'm going to be presenting today.

Given the time constraints and the time budget we have, I'm going to be a bit selective on some of the commentary charts I have, but all the charts are in your deck and in question period we can go back to those. I would also like to comment that I think some of the questions that were raised by the members will be addressed and answered by our presentation.

As I said, as far as the agenda is concerned, we do have a fairly detailed schedule here, but where I'm going to be concentrating and spending our time relates to the loan approval areas according to reports given by both the small and medium-sized businesses, as well as the account managers, who participated in a separate audit. We'll also be spending a considerable amount of time looking at what we see are the causes when loans are not approved and what are the elements that help to optimize and improve the success of small and medium-sized businesses as it relates to receiving loans from financial institutions. Then we'll close by covering off how small and medium-sized businesses talk about customer satisfaction and their level of satisfaction with financial institutions. While it's not on the agenda, I do have some charts on new business start-ups across the country.

So as I said, bear with the amount of information we have here.

I'm going to be presenting in English. However, I believe French copies of the presentation are available to the members today.

Also, you'll notice on the bottom of each chart, so you can follow along with me in the deck you have, we have indicated the page number. As I skip along you will be able to follow me.

I will just set the scene concerning the mandate that was presented to us for conducting this study. There are four or five key areas in what this study is intended to do. One is just to provide an overall profile of the relationships small and medium-sized businesses have with financial institutions in Canada, their banking relationships as well as their lending relationships. Second, we wanted to be able to examine and provide some very accurate statistics for the actual loan approval rates given by both the banks and other financial institutions in Canada. Then we wanted not only to present what the approval rates are but to be able to drill down and dig deeper and say what are the elements that will help to optimize or increase the likelihood of having a loan request accepted, and flipping that around on the converse side, what are the root causes behind loans that are not accepted, the root causes behind turndowns. This study does look at that area.

The third or fourth area really relates to the whole element of customer satisfaction, not only providing a report card on the levels of customer satisfaction but again giving an indication of what elements help to drive customer satisfaction. What are those things a financial institution or a bank should be addressing in order to enhance and improve customer satisfaction amongst their base?

As some of you know, I was here last year. This is the second year of conducting this study, so in essence what we've been asked to do is to provide a report card on how small and medium-sized Canadian businesses are relating to the financial institutions and how they evaluate the service and the performance of those particular institutions.

The design of the study is very similar to what we conducted last year. There are three components to it. In the next chart I will go into the details of how the study is actually conducted.

The timing is basically the same, with the one exception of the component that relates to the quantitative measurement of financing requests given to the account managers. That was moved from a January-February timeframe to a fall timeframe, the feeling being that this would give a more representative look at the types of loan requests that are coming into the banks at that time of year, as opposed to January-February, which tended to be more renewals as opposed to new loan requests.

• 1020

I'll just talk briefly on the actual make-up of the study. We spoke to just over 2,500 small and medium-sized businesses across the country. To your question, Mr. Bellemare, the definition of a small and medium-sized business is in this mandate—I believe it is the one that was set between the banks and the industry committee—and relates to those companies with sales of under $50 million and also, in terms of employee size, of under 500 employees.

Having said that, I do want to emphasize that of those 2,519 companies we spoke to, 60% had sales of under $500,000 and 70% had sales of under $1 million. So while this breadth of coverage for SMEs is very broad, it should be recognized that of the companies and the individuals we spoke to, the vast majority are indeed in the very small segment, i.e. 60% have sales of under $500,000.

Also, while the mandate was to speak to companies with employee size of up to 500, I believe 50% of the people we spoke to within this survey have less than five employees. So the largest concentration of people that we spoke to in our survey is indeed at the very small end of the scale—I do want to assure you of that.

The other comment I should make is that this is a total random sample of businesses across the country. We are not just speaking to bank customers. We are speaking to business owners and managers across the country, and dealing with a variety of institutions. Yes, the largest percentage of them do deal with the seven major banks, but we do have a representative cross-section of businesses across the country.

The other major component of this study is that not only did we listen to and speak to small and medium-sized businesses, but we also have a very interesting component where we asked account managers for information. We had 1,000 or so account managers distributed across the seven major banks who actually kept a recording form in terms of requests coming to them during that period of October and November of last year.

Basically those request forms asked that for that period of the month, each time an individual came to them and made a loan request, it was the account manager's responsibility to tag that loan request and to fill out the form in terms of what information they received, what happened to that loan request, if it was approved or not, etc. So we now have very accurate figures in terms of this audit of loan requests, which are conveyed in this study. I will be talking about that as well.

Again, I do want to emphasize that the study is representative, and I think it is indeed a very rigorous profile of Canadian businesses across the country.

I've made the comment, and as you see here we do have distribution across the provinces, across the regions. The question was asked whether we can go down to the level of individual cities. We have 2,500 responses from across the country. We have a representative sample in each of the eight regions that have been designated by the committee, on a provincial basis, and in Ontario we do have coverage by some of the smaller sectors—three regions within the province of Ontario. So the sample frame is not localized to major markets. It includes rural areas, small communities, etc., so it is a very rigorous analysis of Canadian businesses across the country.

I'll just briefly set the scene as far as the profile of small businesses. I touched on a couple of those in my introduction. When we look at the small and medium-sized business profile, we see that the vast majority of companies have a very long-standing tenure—indeed, 59% have been in business for more than ten years.

We hear a lot of attention about KBIs and high technology, but when you look at the profile, the largest percentage of businesses relate to the services, to the retail sector, and to the construction sector. There is a variety of sectors that are representative, but as you can see there are a number of key sectors that really make up the fabric of small business.

I touched on the part about $500,000 of sales or more—65% actually report sales of under $500,000, so SMEs do represent the small sector of the economy.

Just another fact I would like to present—again to set the tone and to give people a perspective of it. On the subject of gender, we will be talking about loans to female entrepreneurs as opposed to male entrepreneurs. When we look at the profile of SMEs across the country, one in two businesses have an equity or management position held by women. Twelve percent of Canadian businesses are owned exclusively by females, and there's the additional 37% where there's a joint ownership figure. Our study has good representation in terms of female entrepreneurs.

To put that one chart into perspective about the length of time in business, as you can see, the largest percentage really are those companies that have been in operation ten or more years. So there is very strong tenure across all of our businesses, even though we hear bankruptcy statistics.

• 1025

I'll skip to annual sales, page 12. Again, just to look at it, I touched on this. When we look at the profile of Canadian businesses, indeed, more than 65% of companies have sales of under $500,000. So again, we are dealing with a very large base of small organizations, despite the fact that we do speak to companies at the sales level of $5 million to $50 million.

I know there was an interest in terms of special segments. I'm just going to profile some of these special segments. Again, we have within our detailed report a commentary on each of the major segments relating to tourism, exports, KBIs, etc.

I just wanted to very quickly point out what these segments are, the size of them in the marketplace, and then indicate that we do have more detailed coverage in the report itself.

I know there's a concern about the tourism industry. Indeed, 7% of SMEs in this country are in the tourism area. Again, we do have more detailed findings about the tourism sector.

Of Canada's SMEs, 11% are involved in exporting. This is another special-interest segment that we've covered off. As I said earlier, we look not only at businesses in metropolitan areas in terms of the major centres across the country, but we also do look at businesses that are in the rural and non-metropolitan areas. About half the businesses are located outside of major metropolitan areas.

Home-based businesses are another area of interest in the economy. About 25% of businesses operate out of their homes. So the SOHO, small office home office, is indeed a very important part of the SME segment. About 25% operate out of their homes.

Start-ups are interesting. We do go after this in terms of having a representative base of start-ups. I will be commenting on that at the close of the presentation. About 2% of SMEs in total are companies that have started up in the past year. That is, these are recent start-ups. We will look at some of the experiences of a recent start-up versus the more longer-standing businesses.

An interesting one that I know of is also of interest to the committee: knowledge-based industries. When we asked participants who responded on a sort of spontaneous basis whether they were a knowledge-based industry, interestingly, 63% of all Canadian businesses described themselves as knowledge-based industries. It's something that we've put up here, but when you talk about it on a spontaneous basis, a large percentage of companies call themselves KBI.

But in actual fact, when we go to definitions from Statistics Canada or the Canadian industry, it represents only about 2% of the knowledge-based companies. Again, in terms of a company like ours, which is in the information business, we are not technically defined as a KBI, although we would think we are one.

Mr. Werner Schmidt: So who's right?

Mr. Ian M. Lightstone: I think it's a case of both parties being right. I think the real number is closer to 2% than 63%.

Mr. Werner Schmidt: You're not a knowledge-based industry.

Mr. Ian M. Lightstone: Well, I think we are.

Just to set the tone briefly, one of the questions we asked participants was this: what is the major issue that you feel is affecting your operations, your business? This was asked on a spontaneous, open-ended basis.

I think the key thing to point out is that when we asked this question, again, we were talking about the beginning of 1997, so we had just come out of a recessionary period. When we asked this question, the number one answer that was given by business owners was the weak economy. Just to explain the chart, when we asked them, we recorded both their first mention as well as when we probed any other mention.

The first number, 13%, was the weak economy. That was mentioned first. Then when you add up the other mentions about the weak economy, in terms of total mentions, it's 16%. The weak economy was the number one issue they said was affecting their business.

The second issue is just their ability to maintain an income, to have profits, etc.

The third issue was taxes.

I raised this because the fourth point concerned obtaining financing. So that was not the number one issue as far as business owners were concerned.

We did not go into any of the other questions on the survey. We strictly wanted to ask them on a spontaneous basis about the number one issue they felt affected their business. Indeed, number one and number two were the weak economy, the whole aspect of profitability, and just having enough income to operate their business operation.

The key question of course in this whole process is, how do businesses finance their operations? We asked this in two ways.

First, we asked them how they financed their operation. Then we drove down a bit deeper to ask them, in terms of the past year, whether they had gone to a financial institution for any lending or financing.

If I may, sort of on the broad picture, in terms of financial coverage, as you can see from this chart, most SMEs use a variety of sources to obtain their financing or operate their businesses. Those sources range from the traditional financial institutions, in terms of borrowing from a bank or other financial institution at 50%, to their own personal savings, to friends and family who have either provided loans or put money into their businesses, right through to credit cards, etc. So they are using a large array of different sources to finance the operation of their businesses. They are not solely reliant on one or two types of mechanisms.

• 1030

The vast majority, 94%, say they use some source of financing. That 6% was down from the 10% I believe we saw last year in terms of our study. That number is significant.

Just to explain those arrows, when you see an arrow pointing down, that means the number is significantly lower than what we had last year. An arrow pointing up is significantly higher than the number we saw last year.

So as you can see, there is a variety of sources that businesses rely on for their financing.

Please go to page 18. I think I've made this comment. Most businesses have some sort of multiple sources, so this chart tells us that 46% of the businesses use banks plus some other sort of financing. That financing may be from another type of financial intermediary, a government lending agency or personal sources. Most individuals at 46% plus the 30% who use other sorts of multiple sources equals 76% of SMEs that rely on more than just one source for the financing of their operation of their businesses, and 18% are only single sources.

I pointed out credit card usage on the two charts before. This was something we pointed out last year and an area that we know was of particular interest to the industry committee in terms of to what extent businesses use credit cards as a source of financing and why they use this sort of mechanism. If we look at it in terms of the percentage of businesses that use credit cards as one of the vehicles for financing, 54% use any form of credit card.

Interestingly, while there are both business credit cards and personal cards, personal credit cards at the SME level are used at almost twice the level as business credit cards. So there's a very strong reliance on using one's own personal credit card as a means to help finance one's business.

Two points are important here in discussing why there is a widespread use of this type of vehicle. When we ask business owners whether they pay off their balances in full or carry a balance, 71% say they pay off their balances in full and about 29% say they carry balances. If you look at that balance, the median amount is between $1,000 and $3,000, so most are paying off their balances on credit cards.

The other important finding here is that when we ask them “Why do you use a credit card for financing, why don't you go somewhere else?” basically they view them as a convenience tool. They help them in terms of making their purchases. They're very convenient from the point of view of how they obtain credit and they're also very convenient in terms of how they pay for their different purchases.

So 71% say they use credit cards for convenience, about 25% use them for some sort of financing purposes, but if you look at the chart, 15% say it's for short-term financing. Only 3% said they were the only source available to them. This shows that credit cards are a convenient source of financing to run one's business. They are not seen as a last resort as far as financing is concerned.

In terms of the types of credit facilities that are used, 50% rely on banks or other financial institutions for some sort of financing. As you can see, the largest percentage use operating lines. These numbers will vary by size of company, and there are some statistics in the report itself indicating which types of companies. Larger companies tend to have wider use of operating lines than smaller companies. But there is a wide array of vehicles that business owners are using in terms of financing their operations.

Of the 50% that rely on banks or other financial institutions for financing, 85% use operating lines. The bracketed figures are the percentages, if you take all SMEs, and 42% of all small to medium-sized businesses in Canada are using operating lines or lines of credit as one of their vehicles. But again, as you can see, there is a wide array of sources and vehicles. As for SBLAs, 16%, or 8% of the total population, say they're using SBLAs or FIMCLAs as a financing source.

• 1035

If you wouldn't mind moving to page 23, I'd like to talk about the second component of how we examine the access to credit. Not only did we ask people what types of facilities they use for financing, but we also wanted to know what their experience was over the past year. Did they make a request for financing, and if so, what happened to that request?

We see here that only one in three businesses indeed went to a financial institution and made a request for some sort of lending for their business. That number, by the way, is down 4% from last year. We're reporting 32% in the 1997 study, and in 1996, 36% said they had made a request to a financial institution in the past year.

Again, it's more prevalent with larger businesses. There are some differences between one type of organization and another. I certainly know that female-owned enterprise is an important issue as part of this committee and as part of our business fabric. As we can see here, female-owned enterprises are less likely to go to a financial institution to make a request than what we're seeing for businesses owned exclusively by males.

We do have an indication of why that number is lower. We also asked them why they don't approach them, and what we see from this information is that the largest percentage, whether it be males or females, say the reason they don't go to a financial institution is they just don't need the lending, they just don't need the financing. So there is no indication that the fear of being turned down is higher or lower for females than it is for males. Indeed the reasons they don't approach a financial institution are basically the same, i.e., they themselves feel they do not need the financing to operate their business. That is a definite fact.

As far as the cycle for financing goes, again this came up as an output from last year's study. We wanted to see not only what percentage of businesses made a request within the past year—and as we said, 32% made a request in the past year—but also what percentage of businesses had ever made a request for financing. When we asked that, two-thirds, 67%, said yes, they had made a request to a financial institution for financing. Interestingly, 33%, one-third, of all business owners said they had never gone to a financial institution to make a request. So two-thirds do and one-third doesn't.

When we look at the timeframe as far as the cycle goes and when they make requests, it seems business owners go to a financial institution about once every two years. So the financing cycle as far as going and making a request is concerned is about once every two years across the country.

This is an important chart, because again, we wanted to get down into the reasons. When we say only one in three actually go to a financial institution to make a request, the key question we wanted to pose to them is why not? Why are you not going to a financial institution? When we speak to business owners across the country, in large centres and in small communities, the number one response we hear—and it is consistent across males and females, new start-ups, established businesses, etc.—the reason they're not approaching an institution is that in their minds, they don't feel they need the capital. They feel they can use their personal savings. They feel they just don't need that type of capital to run the business.

We've done some qualitative work recently as well. We've heard from people who have been laid off by large corporations and who in actual fact have taken their severance funds, their severance packages, and put that into setting up a business. So in their minds they don't feel they need to go to a financial institution for financing. That's why we have that 80% number in total. If we look at the clients of the seven major banks, it's 83%.

So that is the number one reason they do not approach a financial institution. It is certainly not a fear of being turned down. Only 6% in total say they have not gone or they will not go because they're afraid of being turned down, or that their request will not be approved. Those numbers are basically the same as last year.

I'm going to present very quickly page 26. This is where you'll start to see some of the samples from the account manager request forms. Basically we asked business owners to indicate what type of credit facility they requested. As you can see, again there's a wide array, but the large percentage is with operating lines. Then we asked the account managers to do the same thing, and again we see they report operating lines.

I'm sure you'll probably notice there are some differences. For example, 15% of the account manager audited requests said this was a loan for SBLAs or FIMCLAs, whereas the SMEs only reported 3%. While you have these differences, it's more a case of terminology. Business owners may or may not know the exact definition of their particular loan vehicle, versus of course an account manager; he or she would have more specific details. But by and large there's good consistency across the reporting of both the business owners and the account managers regarding the types of vehicles being used.

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I'll skip to page 28, and this will address one of the members who was asking about provision of personal guarantees, whether they be guarantees or providing assets or security as collateral. Again, this issue was raised by last year's industry committee, and we incorporated it into the study. We wanted to see what percentage of business owners, when they did go for some financing, were asked to give some sort of guarantee or to post some sort of collateral.

Of all those who approached a financial institution for financing, 65% in total and 64% of the seven major bank clients were asked to give some sort of personal guarantee or to put up some sort of asset or security as collateral. As you can see, breaking it down, personal guarantees are 57% and personal assets are 37%.

I do believe somebody made the point that a higher level of female entrepreneurs are being asked to give guarantees. As we get into that—and we did an analysis of that data—we see it is not related to gender bias at all; it is correlated with the smaller size of that particular operation or the type of operation they're in. We see no gender bias whatsoever in any of the data we've examined here in this particular study.

If you would turn to page 31, I just want to make one comment. We heard a lot about where business owners and managers go for financing. Most go to the traditional financial institutions, whether it be the banks, the trust companies, the credit unions, or the caisses populaires. We wanted to see if business owners were approaching alternative sources. As you can see from this chart, a very small percentage of Canadian business owners are going out to alternative sources; 14% who have approached a financial institution and only 8% of those who did not approach a financial institution went to alternative sources.

That was a spontaneous question. When we asked them what other alternative sources they were talking about, again, what we see is that in their minds, the alternative sources were either personal savings or loans from family or friends. At this level, they do not see a lot of alternative sources, whether it be from government or other types of financial institutions. They're still relying primarily on the traditional financial institutions for their sources of funding. So as you can see, only 11% of that 14% actually approached some form of government lending. The government side is not recognized or well known as an alternative source; that's what we are seeing here.

I'd like to move into the section on loan approval rates. If you turn to page 34, this will give you an indication of what the loan approval rates are. To give you a sense of how we collect this information, as I said, we speak to both business owners and what we call the SMEs, and we ask those who went to a financial institution and made a request for lending, “What happened? Was it approved in full? Was it approved in part? Were you turned down? Is your request still pending? What happened?”

So we have a reading from business owners, and we also have, on the flip side, where we asked the account managers to record in October/November. We have over 4,000 actual recordings of requests that came into their offices, where they were approached or asked for some sort of lending. We have that measurement as well.

I'm going to first show the SME side and then I'll present the account manager side. As you can see from the numbers, of all loan requests that SMEs made to banks and financial institutions, 87% were approved. That number is up from 84% last year. That is an improvement from 84% to 87% in total, and if we look at it for the seven major banks, again, the vast majority, almost 9 out of 10 loan requests that are presented to a bank, 87%, are approved.

I'll break that down into whether they're approved in full or approved in part, but the loan approval levels are indeed very high.

If you look at 1997 versus 1996, this is including the full spectrum, including still pendings as well as turndowns. Turndowns this year were 12%, versus last year at 15%. As you go through your full report, you will notice there are some variances across different regions and across different sizes of business, but by and large, across all segments of the business population, the vast majority of loan requests are approved, and indeed 93% are approved in full. So very strong approval rates are presented by business owners.

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We do have information here by the individual banks. We asked customers of those individual banks, so it is reported, and the full details are in your report. But as you can see, there are some variances from one institution to another.

The first number of approvals includes the still pending. If you take out the final approvals of those loans that are still pending, we see that SMEs dealing with the major seven banks all report approval rates of over 80%, with some variance from one institution to another.

Keep in mind that our sample sizes may be around 100 or 50 customers in some of these institutions, so from a sampling point of view, there are some error ranges. While a number may be posted as 82% or 84%, there will be some plus or minus numbers on those. But when you look at the numbers, all of them are well over the 80% level in approval rates. That's a very high level of approval, as reported by business owners.

Similar numbers are reported by the account managers. A similar question, as I said, was posed to the account managers from the recording form. If we look at the final approval rates, we can see there is some variance, but again, they are virtually all very high. Keep in mind that the Hongkong Bank and some of the other ones will have some larger variance because of the sample sizes.

But as you can see, in total, the account manager audit forms show that 80% of all requests are approved. When we actually speak to business owners, they report that 87% of their requests were approved by the financial institution they went to. So both numbers are reporting high figures.

I'll make a comment about the types of loans. Certainly loan approvals are higher for loan renewals, at 93%, but when you actually look at new loan requests, 82% were approved either in full or in part by the particular institution.

If I may ask you to turn to page 40, I'll go through the root causes. When we ask business owners or account managers to indicate what happened with their loan requests, one of the questions that has come out of this whole process is how do we determine what are the root causes behind loan turndowns? Or indeed, how do we determine what types of elements, what factors, help to enhance the likelihood of being approved?

We take our data and run it through a very rigorous type of analysis, what we call a multiple regression analysis. It's a process used by economists and by Statistics Canada. Basically it tries to take each of the elements, whether it be gender, region, size of business, etc., and try to determine whether or not one of these have any impact on loan approvals.

We conducted this analysis, and I'm going to take you to where the chart shows it. If you move to page 42, you'll see that when we did this analysis just looking at the SME side of it, there was no indication whatsoever when we examined this data—and we used some very sophisticated and rigorous techniques—that there was causal effect relating to type of industry, there was no evidence of any gender effect, and there was no evidence whatsoever to indicate a cause related to the size of the business. So we are seeing no discrimination in terms of some of the originally hypothesized elements that were presented by the committee to the industry committee.

If you look at page 43, you'll see the primary drivers. Basically, in terms of the merits and the operation of the business, these are the key elements that drive loan acceptance. For example, if you are an existing business borrower, the level of approval is higher. Sales revenues, yes. Providing an application form is indeed a very critical part of increasing the probability of success.

You'll notice that we have regions, and we want to see if there's any regional bias. Overall we're looking at eight different regions. When you look at it, yes, you'll see some minor indication that eastern and northern Ontario have a somewhat lower likelihood of success. However, I can tell you, and there's a detailed commentary in the report, that where this comes into the model is at a very low level of significance. Indeed, when we examine it at a higher degree, there's really no significance attached to that particular number. On the flip side, we see that in Manitoba and Saskatchewan there's a higher probability of success.

• 1050

Overall, the presence of regions as part of this equation is very limited in this model as determining the key drivers.

As I said earlier, we see no root causes as they related to individual demographics.

I'm going to flip a couple of pages and make a comment on page 46 and loan acceptances by the account managers. We did a similar type of process here. I will make a very general statement; I won't try to get into all the statistics.

What comes down when we do this rigorous mathematical analysis of the data, what we see when we take all those 4,000 loan requests from account managers...basically the information tells us there is no discrimination by gender, there is no discrimination by region nor by size of business, etc. What it's telling us—and the data demonstrate this—is that the loan requests are based on the merits of the business case presented by businesses. There is no evidence whatsoever in the data we've collected either from the account managers or from the SMEs that there is any discrimination as far as lending approvals are concerned as it relates to demographics or any of the hypothesized variables of gender, region, etc. I think there is a very strong database here to be able to make that conclusion.

I'm going to skip some of the strategic implications and go to some other sections I know are of critical importance to the committee. One is this relationship of turndowns and adherence to the code of conduct requirement.

I think Mr. Shaughnessy made the comment that yes, account managers believe very strongly they are presenting small and medium-sized businesses that are turned down with information about how to be reconsidered. Although 73%—and that's up from last year's 61%...still that type of approach, that type of message, is not necessarily getting through to the business community. Only 40% of business owners who said they had been turned down said yes, I was provided with information on how to be reconsidered. Again, I think from a communications point of view there's a need for getting out the code and making sure account managers do a better job of communicating the different implications of that. As we can see, there is a bit of a gap between what the account managers feel they are doing and how the SME interprets that, so there is some gap there that I think has to be addressed.

As for how directions are provided, I think two things are important to get across. Again, I think it's something the banks have indicated needs to be addressed further. First, if they are providing information on direction or what is required for reconsideration, it appears the business owners feel it's being given to them only verbally, with 38% saying it was given to them verbally and only a small percentage saying it was given to them in writing. However, it depends on how the code is set up whether verbally is a correct way, but only 30% or so receive it verbally.

The other thing I think is important from the point of view of communications is that of those SMEs that were turned down, whether they were given information on alternative sources, only about 1 in 10 say they have been given information on alternative sources. Again, I think this is partly a communications issue that has to be addressed. The code is there, and how it gets communicated to the business owner is an important one.

Another part I think is important to look at from a communications point of view is the awareness of the ombudsman and the complaint process in place.

What we find is that only about one in five business owners, whether they are dealing with banks or with other financial institutions, is really aware of the whole process. Again, I think this is an indication that there needs to be further communication of what is actually in place, because most business owners aren't really aware of it.

The other finding is that it's perhaps also a reflection that when we look at those people who had a turndown, it was only one in five. So it's not a case of just those people who have complaints or an issue. What we find is that business owners in general just aren't familiar with the particular process in place.

I will move to page 53. This is looking at reported changes in conditions. Last year, as we did this year, we looked at loan approval rates. Again it came up, fine, you may be approving last year 84% of loans and this year 87% of all loan requests, but perhaps the conditions and the terms of our relationship have become more stringent and more onerous. So we put some additional questions into place, asking, did you notice any changes? Has the bank or financial institution you're dealing with changed your loan status? Have they changed the loan conditions? Have they changed your collateral requirements?

If you look at all of these four areas we talk about, reporting requirements, collateral requirements, etc., the vast majority, virtually 9 out of 10 business owners, say no, I have not noticed any changes this year versus last, either in my loan status or the loan conditions, collateral requirements, etc. A couple of percentage points on each of them got more or less stringent, but when you look at all those different measures, 90% or more say there has been no negative or adverse change in terms of the conditions or stringency of their loan relationship with their financial institution.

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Mr. Werner Schmidt: I'm curious about the communications strategy here. What's the difference between no change and stayed the same?

The Chair: Mr. Schmidt, not too many questions. We only have five minutes to finish the presentation.

Mr. Werner Schmidt: Is that all we have?

The Chair: Yes.

Mr. Ian M. Lightstone: Similarly, there were no changes in reported fees; 64% said no change.

If we have five minutes, I want to get into the satisfaction levels. I'm not going to go into all the detail. I want to show you the actual numbers we have in terms of presenting.

Basically, what we look at in overall satisfaction with the financial institutions is 70% said yes, I am satisfied with my institution, in total; 67% amongst major banks. That number has softened a couple of percentage points from last year, and it's something we're seeing in terms of satisfaction measures across all industries for different types of services. So there has been a general softening as far as satisfaction is concerned, but still the vast majority are satisfied with their financial institution.

On page 61 we break it down by different elements. What we find is that basically not only are the majority satisfied with their financial institution, but they seem to be most satisfied in terms of the banks providing convenient business banking. What we see in terms of some softer measures, what's not coming through as well as perhaps should be, given the high levels of loan approvals, is the feeling that the banks are as flexible as they can be in terms of the relationship as far as the lending side of it. Those numbers at the bottom end of the chart are less satisfied, although they feel the convenience side is well delivered by their financial institution.

We have similar breakouts by account managers and branch staff. Again, I'll make the general comment that account manager levels have softened somewhat, but again this is something we have seen in terms of service levels across a variety of different institutions or business categories, not only financial services but other services being delivered to businesses. This is one of the areas that has caused some of the softening as far as satisfaction with the financial institutions are concerned.

Branch staff numbers are always high. They tend to be higher than what they are with the account manager staff, but again there has also been some moderation, some softening, as far as that part of the process is concerned.

If I could direct you to page 68—since I can see the clock ticking—as to what are the key drivers of satisfaction, I think basically what we're finding in terms of our analysis is that business owners are saying the key things that really drive satisfaction, if the banks put their emphasis on here, are flexibility; that is, being able to work with me in terms of different operating conditions, different economic conditions, and so on. Flexibility is one of the key issues.

They are also looking for their institution to be there and support them in good times and in bad. They also talk about timeliness.

There are five key elements: flexibility; dependability; timeliness; responsiveness; as well as the overall convenience. They are saying these are the key elements that drive particular satisfaction.

What they're also asking for is not only do I want you to deliver the functional elements—that is, being there, being accurate, and being quick—but I also want to have a strong relationship with the organization. We find they are looking for this empathy relationship or this non-functional relationship with their account manager, as well as the functional elements relating to the timeliness and to the dependability. They are looking for a strong relationship with their account manager.

I'm going to leave you in terms of some comments I made. Bear with me a second. I want to go into new business start-ups, because I think that's an important area. Please go to page 73.

This is a question we've asked in a couple of ways. One, we did a third component of our study and actually tried to see what percentage of individuals across the country have made an effort to start up a new business in the past year. What you find when you speak to households in general is about one in ten households say that either they or somebody in their household has attempted to start a new business in the past year. These types of new business start-ups can be anything from people starting up in their basement to actually trying to put together a more complete business.

But if you look at the numbers, 60% or so of them are still in operation, so most of the people who tried to start up are still in operation. A certain percentage said no, I had an idea but it didn't get started; I either got something else that was better in terms of a job or I didn't think there was enough interest, etc. Then, as you can see, less than 1% of those attempts actually failed.

• 1100

We did some in-depth probing two years ago in terms of the failures. Again, most of those people said the idea wasn't good enough or people weren't interested in their idea or they found a better job. Very few of them said it was because they could not get financing. Most of them felt the decision was based on their own elements as opposed to not having sufficient funding from a financial institution.

Just to look at past-year starts, what we see is that one in three currently have financing, and 31% actually sought financing from a financial institution in the past year. As you can see, the approval rate is lower for the start-ups, but again, when we do our analysis in terms of start-ups it is not a function of the fact that they are start-ups; it's a function in terms of the size of their businesses and the materials or collateral they're presenting. They are elements relating to business merit cases as opposed to any sort of discrimination against start-ups.

The interesting point is that their satisfaction levels were higher than those of business owners in general.

I'd also like to look at the business start-ups in the past five years. If I may, I'll ask you to look at page 79. You can see with respect to that earlier chart that I'm saying 40% of those past-year start-ups did not have their loans approved.

To look at it in terms of building a bigger base, we asked those companies that started up in the past five years to go back to what actually happened when they started up their business operations.

As you can see in terms of the total SMEs and those dealing with the seven banks, when we build up to this bigger base of companies who started their business in the past five years and ask them to tell us what happened in that first year of operation, in actual fact 81% of SMEs in total and 88% of those who started up with a major bank said they had their loan approved.

As you can see, there's some variance. Part of it is really the sampling error. When you look at it, 88% of all major start-ups had their loans approved.

The other element is that we asked people who said they bought into a new business, not just those who started up. We asked those who bought or acquired an existing business. Again, we see a very high approval rate of 85% to 90% with the seven major banks. So there is an indication there.

I think I have two or three more minutes on that.

The Chair: Less. You're into the negative right now.

Mr. Ian M. Lightstone: Why don't we close there? You have the key findings and some commentary. I'm certainly open to questions.

The Chair: Thank you very much, Mr. Lightstone, for that very rapid presentation—

Mr. Ian M. Lightstone: You're welcome.

The Chair: —and I want to thank the interpreters.

Mr. Ian M. Lightstone: I apologize for that.

The Chair: It was actually very informative and very well presented.

Mr. Ian M. Lightstone: Thank you.

The Chair: Mr. Schmidt, you may now ask your question.

Mr. Werner Schmidt: No. I'm not going to ask that question.

Some hon. members: Oh, oh.

The Chair: You now have your time.

Mr. Werner Schmidt: Thank you, Madam Chair. I appreciate your discipline.

With respect to the material presented on page 20, Mr. Lightstone, on the relationship between term loans and operating loans, it seems to me that according to the graph, about 85% of the SMEs need operating loans and about 47% need term loans. That's about how it breaks down.

If you compare that with the actual pattern of the banking community, there seems to be a considerable difference between some banks and other banks. In some cases, the banks lend pretty well according to that requirement and in other cases they don't. I'm looking particularly, let's say, at the Bank of Montreal, which seems to be pretty well consistent with that operation, while at the Bank of Hongkong there's a much higher percentage or ratio of term loans. The same thing, I believe, happens with the Bank of Nova Scotia.

What is the relationship, then, between these banks and their relationship with the businesses? Does this mean that Scotiabank and the Hongkong Bank meet a different clientele compared to the other three banks? What kind of implication does this have for a business wishing to apply for money? Will one set of businesses go to the Bank of Hongkong and the Bank of Nova Scotia and a different kind of business go to the other banks?

Mr. Dieter Jentsch: If I may comment on that, Madam Chair, certainly if you look at our history, our lending strengths have traditionally been in real estate and in transportation and some of those sectors. Those sectors predominantly have a requirement for term-debt financing, so I agree with the hon. member from the Reform Party that different clients have different requests and that each organization has its strengths and weaknesses in the marketplace. Certainly when we look at where our strengths are in the trucking business or in the transportation end, where traditional exposures have increased, and the real estate side, to reiterate, those are the traditional areas for high term debt financing and limited working capital requirements as an overall capital requirement of those businesses.

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Mr. William McLaney: I'll add just one comment to that. Many of our customers are in the import-export business, where letters of credit are not really very well measured by these statistics. Although letters of credit are for short-term operating needs, they are not a direct-lending facility. So many of our customers will have a larger component of letter of credit financing than direct lending.

Mr. Werner Schmidt: Would the letter of credit financing be defined here as a term loan?

Mr. William McLaney: It probably escapes the definition, if I'm correct. It would be an additional working capital type of facility provided to a customer.

Mr. Werner Schmidt: Then, Madam Chairman, would it be captured in the overall...? The aggregation here on page 20 suggests that overall the requests by small businesses for operating capital vis-à-vis term loans are roughly 85% to 47%. Would that still apply in your case, in your observation?

Mr. William McLaney: I would again guess we're a bit slanted to the term loan side, for a number of historical reasons and because of the type of customers we have. I'm just saying the skew isn't quite as much as it looks like, because of that import-export financing component.

Mr. Werner Schmidt: Madam Chairman, this then leads into certain other aspects. There is now apparently a move towards...and I think CIBC is on record now as being very much in favour of mergers; of banks being able to buy each other. Would that change the pattern? What would happen if certain banks merged now? If this is the requirement, would that then shift in terms of the attention to the demands of SMEs?

Mr. Kelly Shaughnessy: Madam Chairman, seeing that the CIBC was mentioned—and I would also ask my colleagues in other banks to answer that question—if there were to be a merger of two banks, I think the reason for the merger would be to leverage the strength of the two banks and not to exclude one customer segment of one of the merged banks. I would think if there were a merger it would be to leverage the strengths and to continue the traditional business of those two institutions.

Mr. John Leckie: At TD we think it's going to be very difficult to demonstrate to the consumer that a merger is to the benefit of the clients.

Mr. Werner Schmidt: You see just from the pattern here there would have to be a pretty selective mergering pattern going on if they were going to serve the needs of the client.

The Chair: Ms. Jennings.

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): My question is addressed to Mr. Lightstone, but it's possible the representatives of the Canadian Bankers' Association will wish to address it. It's about your statistical analysis, which indicates there is no cause-and-effect link between credit approval and the factors that were mentioned on pages 7 and 8 of the report: gender, region, years of experience in the industry, etc. Can you qualify exactly what you would consider to be evidence of a cause-and-effect link between credit approval and one or all of these factors?

Mr. Ian M. Lightstone: We've examined a number of elements. As I said, when you look at the report in terms of where there was an indication in a very, very low and very limited area, unfortunately it was one in terms of eastern and northern Ontario. Yes, when you look at the actual approval rates, they are higher this year than what they were last year, but when you neutralize all the information there is that very minor indication. But it is not at a significant level and it just enters into the model at almost the last point.

I don't have the list of any of the other elements at the top of my mind. We wanted to zero in on those major elements, factors that were hypothesized by this group over the course of the last couple of years, to see whether indeed there are any specific areas.

What the data are showing us consistently is that there is no discrimination in these hypothesized areas. Everything coming through in what the business owner is telling us and what the account managers are telling us is that each application is examined on its own merits and judged on the business case of that particular application. We don't really see any real areas...as I said, there are some where we've indicated the individual areas, and just off the top of my mind I don't have an answer for that, but we feel very confident there's no indication of that.

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Ms. Marlene Jennings: I have a supplemental question to that. May I ask why the issue of race wasn't one of the factors that was studied, and let me explain why. It's because in the United States there have been studies that have shown race is a causal factor in credit approval or loan approval with certain banks—not all banks but certain significant banks.

As you know, Canada is becoming more and more diverse racially and ethnically. In Quebec, for instance, several years ago what was then the minister of international affairs, immigration and cultural communities—which is now called the ministry for relations with citizens and immigration—actually did a small, very limited study to look at the issue of credit approval for start-up companies by blacks and found that race was a factor. As a result of that, they created a foundation, the Matthew DeCosta Foundation, in order to provide loans, credit to small, start-up businesses or existing businesses that had less than five years' experience in order to counter what the study had shown. Can you answer why this wasn't a factor that was studied?

Ms. Anne Sutherland: The reason why race and maybe some other matters weren't put into this study was because we weren't asked to. At that time, when we reviewed last year's results, there were a number of questions that would come up about focusing on the various elements Mr. Lightstone has indicated. But if that's something this committee would like in next year's survey...of course we're always willing to work with the committee and ensure that we're addressing our collective questions on making sure credit approval is as unbiased as it possibly can be.

Ms. Marlene Jennings: Thank you.

The Chair: Thank you, Ms. Jennings.

Madame Lalonde.

[Translation]

Mrs. Lalonde, do you have a question?

Mrs. Francine Lalonde: I have several questions; since we are short of time, I will ask them one after another.

Why did you decide not to use the methodology of a longitudinal study? This would have meant asking the same questions of the same companies? This would have made it easier to follow the fortunes of new companies and to observe bankruptcies.

I think there is a serious flaw in the questionnaire. It applies only to companies that are still in business. Those that have gone under are, by definition, out of the picture and are no longer around to tell us what role the bank played. I know that in the area where I perviously worked, it was said that small businesses in trouble were likely to turn to their banker. This is probably the last place they should seek help, because he will surely cut their lifeline. Those that have disappeared can no longer tell their stories. In my opinion, this creates serious problems.

It says on page 75 that "the rejection rate reported is considerably higher (41%) than for the SMEs in general (12%)". This applies to new businesses and to access to credit. It appears to me that this figure quite accurately reflects the reality I observe in my constituency.

Finally, I find this survey extremely interesting for the information it includes, as well as for what it excludes. A small business that is doing well, in an industry that is quite stable, manages to survive. But those that are really interesting in economic terms, if you will allow me this expression, are those that are created and manage to grow even in volatile sectors.

Today, we talked about the knowledge economy. Your figure on page 13 is most interesting: according to the Industry Canada definition, 2 percent of SMEs are in the knowledge economy; however, 63 percent believe that this is where they are. We know that businesses in the knowledge economy, as defined by Statistics Canada, find it much more difficult to get loans. Large amounts of money are needed for start up and growth. The equipment is expensive and the risks are high. Business that succeed do very well, but here is always the possibility of failure.

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Please answer these questions first, then I will no doubt have suggestions to make to the committee. I want to get back to the SBLA.

[English]

The Chair: Mr. Lightstone, were you going to reply to that?

Mr. Ian M. Lightstone: I can address part of that. Certainly your question about the longitudinal study versus a snapshot approach is a very valid and good question on that.

In terms of initially, when the mandate was presented and the banks worked with the industry committee, it was felt that there was to be a snapshot approach of each year, taking a measurement of the attitudes and behaviours of businesses from one year to the next. So we are looking at the population as it exists this year versus last year, and indeed we'll be going back into the field this January.

We are looking at it on a one-time basis. Certainly there is value in looking at it on a longitudinal basis. I cannot personally answer that question in terms of why it was decided to use this approach versus longitudinal. It doesn't say that one is right and one is wrong. They are two different measures. This would be my answer to that part.

In terms of the other part about new business start-ups, as I said, we have to look at the statistics, because there are some ranges here. The one number, which I presented on page 75, yes, does indicate that amongst new business start-ups, the turndown rate is higher than what the population at large is. However, when we build that sample base and we look at a larger base of companies that have started their operation over the past five years, indeed, we see again that the approval rates are in the 85% range. So the vast majority of start-ups do have their loans approved, and that has been shown in all years of the study.

The other question of being able to speak to companies that are not in existence...as I said, we have made efforts to try to find business failures, and while we see a lot of it reported in the paper, still the major population consists of companies that are in existence. There are over one million companies in business today, and this is a study asking if those businesses can get access to credit. That's what we're measuring here, as opposed to looking at companies that are no longer in business. That's another issue that may have to be addressed by the committee. Do you specifically look at individuals who have failed or who have not started? We made an effort at that in 1996, and the percentage in terms of the absolute number of individuals across the country is very small. They are very difficult to find. I realize that many of you have had representations, but overall they are hard to find.

The Chair: Mr. Leckie, would you like to add to that?

Mr. John Leckie: I would like to make the point that I don't think we should be misleading anybody. My own view is that new is riskier, and if we're going to make any progress here we all ought to understand that. As lenders, you're able to predict where the thing is going if it's been up and running for awhile, and you can predict future earnings and lend against those future earnings. That notion is very critical with KBIs. So new is riskier.

In terms of developing policy, we need to think hard about what the Small Businesses Loans Act does vis-à-vis that issue. What do labour-sponsored venture funds do vis-à-vis that issue? Those are taxpayer dollars pouring into situations, which I don't think address the problem of new, and I don't think they address the problem of the creation of equity that is required—

[Translation]

Mrs. Francine Lalonde: Excuse me, I missed the end. I was not listening to either the English statement nor the French interpretation.

[English]

Mr. John Leckie: Where should I back up to?

[Translation]

Mrs. Francine Lalonde: Would you like to get back to the SBLA?

[English]

Mr. John Leckie: I think in terms of developing policy we ought to have, as a group, a hard look at the Small Businesses Loans Act and labour-sponsored venture funds and understand more clearly where the taxpayer dollar is currently being invested vis-à-vis new, small start-ups, which need equity, not debt.

[Translation]

Mrs. Francine Lalonde: May I...

[English]

The Chair: No, not right now, Madam Lalonde.

Mr. Ianno.

Mr. Tony Ianno (Trinity—Spadina, Lib.): Welcome. It is great listening to everyone. I welcome many of the new members here, who have heard you for the first time and I'm sure are impressed with a lot of your skill and knowledge of the process.

Having followed this, as you know, for several years, I see the numbers aren't changing. The percentage is basically the same, 26% or thereabouts. Your total corporate commercial loans to SMEs is roughly 26%. It's unfortunate that with all of the good communication skills we haven't backed up the increased amounts required by small business. I'm talking solely as a total industry.

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If I were to commend anyone...I guess the Royal Bank has now become the small business bank. They're first in terms in percentage. In March 1997, in the numbers you have there, they went up to 31.2%, and they were at 27% before.

Of the other two national banks, the Bank of Montreal has gone to 29.42%. They were the best before. They're slipping a bit. The CIBC is still in the 23.7% range. The TD Bank is at 22.64%. The Scotiabank is at 19.79% and the Hongkong Bank is at 18.01%.

Having spoken to many of you individually, I know the intent is to improve, and I guess each quarter we wait for the new systems to be implemented, the new product lines to take hold. In the end, unfortunately, except for the few that are actually accomplishing what they say they're going to do, it's very disappointing.

What I would like to know is when will we see the systems in place to actually improve the numbers? Could each of you respond, if possible?

Mr. Kelly Shaughnessy: Maybe, Madam Chair, I can kick off on behalf of CIBC and let each of the banks speak to it.

I think there's a premise here that there is a correlation or relationship between the banks' loans to large business and the banks' loans to small business. At the CIBC we do not make that correlation; that is, we have no policy that says we must restrict loans to small business to x percent or we must restrict loans to large business to y percent. They are two completely separate lines of businesses. They are run by different units of the bank. What is most important is, if anything, at the CIBC we would like to lend more money to small business.

There is no restriction of capital or debt capital at CIBC for small business. We want to see our numbers grow. We intend to see our numbers grow, and at no time are we restricting funds to small business as a relation to our lending to large corporate business in Canada.

Second, Madam Chair, Mr. Ianno's statistics are also I think a reflection of the difference between the Canadian banks. Each of the Canadian banks has areas of speciality. The CIBC, as an example, has, as well as being the supporter of small business and a lender to small business, had a long tradition of lending to larger businesses in Canada. It goes back to our founding in 1867. It goes back to the late 1800s when we were supporting the mining industry. When you go across all the resource industries and the real estate industries, this bank has been a supporter of them.

But I want to repeat, and I'll close on it, that it does not in any way, shape or form inhibit our ability to lend to small business.

Mr. Tony Ianno: It's just not a priority? Is that what I'm hearing?

Mr. Kelly Shaughnessy: Absolutely not.

Mr. Tony Ianno: So 1800-and-something is where you started. You have continued that way?

Mr. Kelly Shaughnessy: Madam Chair, if I can answer the hon. member's question directly, small business is a very high priority at CIBC.

The Chair: Mr. Ianno, you've asked each bank to respond and we have to hear them.

Mr. Tony Ianno: I haven't heard the part about what they're going to do to improve.

The Chair: We will ask that the other banks try to address this in their answer then.

Mr. Leckie.

Mr. John Leckie: Mr. Ianno, I've heard your criticism before. Like Kelly, we're not running the bank on a ratio basis. However, your criticism of what are we doing for small business is valid.

I have some graphs for which you don't have to see the numbers. We've been taking these stats, with your help to get the CBA and the banks together to provide them, since December 1995. This shows the level of authorizations for small business in my definition of under $250,000 in borrowings. The red line is the industry, the green line is TD. That's what is happening on authorizations relative to this. I track this, my boss tracks me, and I'm paying a lot of attention to it.

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In terms of outstandings—and this is your big issue, Tony—it's the same kind of chart. I'm not doing quite as well in terms of outstandings, but I am doing better than the industry since we started tracking it. I'll come back to that in a minute.

One that I'm really betting a lot on is the growth in the number of customers. Here, again, we're targeting way ahead of the industry in total. That's how we run our business. Furthermore, you were in to see our chairman, probably about a year ago, and it helped me that you did that because it gets our executive, who are spending a lot of time, as you have intuitively gathered, on large corporate loans.... It only helps me if you push us to get more activity going here. So I welcome that. As you heard, at that point in time I have an appropriate level of capital. Furthermore, I have challenged every branch in the country to grow market share, and we measure that.

So that's what we're doing about it.

The Chair: Thank you.

Ms. Sutherland.

Ms. Anne Sutherland: Madam Chair, I would like to mention that we're proud of the fact that there is a significant increase of almost $1 billion to small business over the past year. As the hon. member knows, we have been focusing on small business for some time. In this forum, quite frankly, I'm not prepared to share exactly why we've been so successful, because my competitors are sitting at the table.

Mr. Tony Ianno: Thank you.

The Chair: Ms. Brochu.

Ms. Lynda Brochu: Madam Chair, I'd state that I like to think our slight slippage is a good news story in that I believe those companies we have in the under $1-million range are moving where they need more credit, they're growing, and it points to the fact that the work being done by the industry committee is right on.

Having said that, my job is $1 million and lower, so I am totally focused on this. That number has been obsessing me ever since it came out. So whatever I can do, we're going to get that moving.

The Chair: Mr. McLaney.

Mr. William McLaney: I don't really have any extra to add here. We are very committed to the market. Historically we have been more of a mid-market than a small bank. Our history has been one of acquiring other banks that were basically in the mid-market and therefore our numbers are not quite where they would like to be.

We're a little behind the other banks in terms of scoring systems and the systems required to do a volume of business, a high-volume business, which small business is, and our executive is committed to putting those resources in place, spending that money, and hopefully we will see improvement as we go forward.

The Chair: Thank you.

Mr. Guindon.

[Translation]

Mr. Jean-Pierre Guindon: I think that all has been said. Nevertheless, I would like to add that we no longer have any restriction or policy of any kind. The bottom line is that we are in business. We meet the demand, whether it comes from small businesses, even very small businesses, or from large companies. Obviously, we are not interested in restricting any applications that may be profitable, because we are in the business of making loans.

[English]

The Chair: Mr. Jentsch.

Mr. Dieter Jentsch: Thank you, Madam Chair. We share the desire and commitment of the hon. member for Trinity—Spadina and of the Government of Canada to business, small and large.

The matter of the small business lending ratio has been raised at numerous past hearings. The position that certainly our bank has put forward, and I believe other members of my peer group, is that the ratio in isolation doesn't really give a true picture of one's commitment and growth in that market. While on a ratio basis Mr. Ianno's numbers are accurate, they do not reflect that in fact in terms of number of customers, authorizations, and outstandings, we have outpaced the industry averages over the last two years.

So while it is true that our ratio has some impact, our corporate lending has also had success, which is a tribute to what's happening in the economy. We believe we need to serve businesses, small and large, because all are important components of job creation, and sustained job creation in this country.

More importantly, we believe if you look at our numbers per se, our corporate loans are 25% larger than our peer group and therefore have an impact on the denominator. But I think we have to recognize that each bank is doing various initiatives, and we are as well, to make the access to credit more straightforward, simpler to use, and more understandable for our customers. We at Scotia certainly follow that in everything we do in our daily work, but that doesn't mean we can't do better. We believe there's more opportunity. There's no shortage of capital. There's no shortage of ways to put money out to our small business customers and serve them better.

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The Chair: Thank you, Mr. Ianno.

Mr. Pankiw.

Mr. Jim Pankiw: Thank you, Madam Chair.

The first thing I want to address is the provision of personal guarantees, and I'd like to share a personal experience I had in starting a business. I sought financing for the purchase of a business. In addition to my personal guarantee, my spouse signing a guarantee. All of our personal assets, which were greater than the sum of the loan...the bank required three times the security for the loan. On the surface of it, that seemed very unreasonable, because if I had three times as much money as I needed to borrow, I wouldn't need to borrow the money. I submit to you that it's unconscionable for a bank to require that much security.

I could further explain that I had to put up farm land as security, and some banks I was negotiating with refused to accept that. In addition to my personal guarantee, all my personal assets, and a half section of prime farm land, they simply said they didn't take farm land as security. I don't think that's an isolated incident.

I think a lot of people find a little bit of frustration in meeting the banks' requirements for security. I invite you to comment on that.

Mr. Kelly Shaughnessy: I will start off on that, with your permission, Madam Chair, but once again I think it's important to get the input from my colleagues in the other banks.

It is very difficult to address the particular incident you've brought up. Perhaps you'd like to discuss it with one of the bankers after.

Mr. Jim Pankiw: No, no.

Mr. Kelly Shaughnessy: I think you'll find, especially at the small end of the market, that the granting of credit is based more and more on the personal credit behaviour of the small business person. Some of the banks at this table have very convenient and what I refer to as low-touch applications, where a minimum amount of information is required. At the small end, the industry in Canada—and I think some of them have excellent products out there—is trying to make the application process as convenient as possible, based upon the track record of the individual as opposed to assets.

I'm going to ask one or two of my colleagues to comment on that because they have individual products to demonstrate that type of credit adjudication occurring.

Ms. Anne Sutherland: Madam Chair, would you mind if I illuminated further?

The Chair: Go right ahead.

Ms. Anne Sutherland: This is just one example in terms of product innovation among not just banks but all financial providers.

About a year ago we launched a product very much aimed at the numerous number of small businesses Mr. Lightstone showed on his screen. The line of credit that is unsecured up to $35,000 is primarily based on the personal credit habits of the borrower, because we were being told by our customers we were making access to credit for very small businesses much too onerous. As a result of that, we have approved in one year almost $0.25 billion, with an average approval of $15,000 to $20,000 of unsecured credit for those kinds of customers.

What we have found, however, and it would be an interesting discussion to get into further, is that many Canadians do not know what their credit bureau is and do not necessarily understand that their paying habits, if they start off when they're 16 or 17, ultimately impact their ability to access debt financing in the future.

As you're probably aware, Wells Fargo is offering a line of credit to Canadian businesses but it will not do any start-up financing. It requires that a company have a profitable track record for at least three years plus a totally clean personal credit bureau.

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So it is in that vein that access to financing is becoming greater for those people who have very good credit histories. But for individuals and businesses who don't, there's going to be a continued challenge in the future.

We and some of the other banks around this table have said that we must make sure we ask for minimum collateral security requirements from those people who have demonstrated a very responsible treatment of credit. We will only ask for collateral security, additional personal assets, for those business owners whose personal credit history is frankly not quite as strong.

So we're trying to differentiate in terms of different kinds of products for different needs, because as you heard from the presentation this morning, there's significantly increased competition for a wide variety of customers out there.

Mr. Jim Pankiw: But my question, though, was for situations where there may not be that kind of past history. Say you're young, you have no history in business, and you want to start or purchase this business. Do you think it's reasonable to require that person to put up three times the amount of security for the loan?

Ms. Anne Sutherland: Since 50% of all businesses fail within five years and, bluntly, since we do not have a crystal ball and do not guess right 100% of the time, I think it's reasonable to expect start-up businesses to put in as much of their personal assets as they can in order to get a business rolling.

The key is that as the business gains credibility with the institution, we bankers can also loosen those requirements as time goes on because the business is demonstrating its ability to repay.

The Chair: Thank you, Mr. Pankiw.

I just want to let members know that we have about 25 minutes left in the scheduled time, and we have eight or nine questions still to be asked. There are about eight or nine people, so I'm going to limit this to three minutes from here on in. I'm going to ask you to make your questions as brief as possible.

Mr. Lastewka.

Mr. Walt Lastewka: I basically have three questions.

On letters of refusal, my understanding from this committee in the past was that this was going to become almost automatic. When someone came in to get a loan, not just for a discussion, that person would be forwarded a letter saying why he didn't get the loan and what they had to do to get the loan.

I'm hearing differently. I'm a little concerned and disturbed on that.

The other area is bankruptcies. We've had many bankruptcies. Yes, we've had many more start-ups, but also a lot of bankruptcies.

I'd like to hear a response on the whys of bankruptcies, the Pareto analysis, and whether it's the government, the bankers, or whomever who need to be doing something to put that trend in a downward mode.

The third one was going to be on training and education, and mentoring. It's shown in the report. My discussions with start-up businesses in the last year are that they really want to get closer to the banks and rely on them for mentoring and their programs and so forth. What are you doing to help them get through those first three years such that we have fewer bankruptcies and more success stories?

Mr. Dieter Jentsch: If I may begin in answering Mr. Lastewka's questions, the first one is this. Our responsibility under the code of conduct was that we do advise our customers as to the reasons for a decline and the alternatives for financing. As presented by the Thompson Lightstone study, our communication of what the customers heard wasn't satisfactory. There's an obvious need to improve that. Notwithstanding our efforts internally to ensure that our branch individuals do communicate to their customers, the numbers show it's not going through.

We instigated initiatives in our own organization whereby customers are provided with a letter in a decline situation that outlines the four primary reasons for the decline. That's followed up in the same letter with alternative sources that can be sought for financing.

This is to really put something written in the hands of the customer so that we can no longer say there's a communication issue. There is, in fact, a letter issued by the bank. I think that will go a long way to address that issue as we go forward.

As to the second issue of bankruptcies, we also share the concern that we see across Canada in which we still have a considerable number of bankruptcies occurring in the business environment. Consumer bankruptcies continue to be at an all-time high. Even though in 1997 we have seen a decline in business bankruptcies, it is certainly of concern to us in our organization that Ontario continues to have some challenges.

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We undertook a survey of our own lenders as well about some of the rationale or some of the reasons why loans went into default and bankruptcy under the Small Businesses Loans Act to see how we could better manage risk profile and risk management in our organization. Really, if you were to say what the top five reasons were for business failure, number one is poor management skills. That comes back to your third point, so I'll get to that when I hit the third issue. From our perspective, and certainly from what we've seen from the SBLA and Industry Canada in terms of the rationales they've seen for bankruptcy, management skills were often not what we thought they were when we put the loan on our books, especially in new start-ups. In our organization, in fact, 46% of our new customers are start-up operations, and it really strikes home to us how important the management skills are for the eventual success of those businesses.

The number two reason provided by all our individuals across Canada is equity and capital that is inadequate to help an operation deal with fluctuations in the business cycle.

The third reason is unrealistic plans and projects that tend to be too optimistic and perhaps don't take into full account the global competition in Canada, in the U.S., and in some of the European and Asian markets.

The fourth reason that's been listed is adverse developments in industry and the economy. You do see some significant shifts where businesses have not kept up with structural changes in their own business. For example, some may still be producing tape cassettes instead of CD-ROMs. We see some instances where businesses haven't kept pace with the change in the structure of the economy.

Fifth, on the small end we do see a large impact from personal challenges that business owners incur: divorce, family problems, and health problems. That's the number five reason for bankruptcies.

Now, to deal with your third question about what each organization is doing to address some of these challenges, if you look at the number one reason I cited, management skills, we do agree that it is a major issue. For that reason, we are developing things like business planning software to provide to our customers. We actually have a whole series and suite of products available to help business owners learn about the business they're undertaking, including areas like banking, marketing, and human resources, some of the major issues, so that businesses have access to education to help them go forward and therefore have less chance of going into bankruptcy.

We think there's more work to be done, and I think we can all share in that.

I see that Madam Chair is telling me to move on.

The Chair: We're going to have a problem here, so I'm going to try to limit people to three minutes. Questions and answers have to be as brief or it's just not going to happen—

Mr. Dieter Jentsch: I appreciate that.

The Chair: —unless everybody wants to stay longer. I really have to move on to the next person.

[Translation]

Mrs. Lalonde.

Mrs. Francine Lalonde: I have a study here carried out by the Canadian Federation of Independent Business entitled, Financial Sexism. You must know it. It concludes that regardless of the other characteristics of a business such as its size or the nature of the business, women entrepreneurs always face a greater chance of being denied financing than men.

Obviously, the survey questionnaire was sent out to directors and account managers. They knew the purpose of the questionnaire and said there was no discrimination. But this study was carried out in 1995; it is not old. In the light of all my experience, it raises questions. The survey may be useful, but it does not provide a definitive answer. So, what are your plans in this regard?

My other question is of a similar nature. It is about the SBLA. I have not read the whole bundle of documents you sent me, but I shall do so. Does it say somewhere how many loans and what amounts are guaranteed by the government? In that case, do you still require such large personal guarantees, and why?

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[English]

Mr. John Leckie: I'll make a comment on the latter point. From my own particular numbers on SBLAs, there's $660 million—that's for loans under $250,000. The total portfolio is $2.66 billion, so that's roughly 25% of the total portfolio. The trend is that SBLAs are going down and the portfolio is going up, and I hope that continues.

The Chair: Ms. Sutherland.

Ms. Anne Sutherland: Thank you, Madam Chair. To the hon. member, I just wanted to address your question on women business owners. First, I am very familiar with the CFIB study, and I think if you have a chance to talk to Mr. Lightstone after this meeting you will discover that we are much more statistically rigorous in terms of the analysis we have done.

Having said that, it is quite clear, not only for women business owners but often for business owners from ethnic minorities and so forth, that to some degree there is concern about communication challenges. I know a number of banks here have taken a number of steps, but what specifically is the Royal Bank doing? We are providing training to our account managers on how to focus on the women's market, ensuring that half of our account managers are women, and making sure that we're also providing training programs across the country for women business owners as well, in terms of addressing the need to build the bridges of communications, because there's no question that continues to be a challenge.

The Chair: Thank you.

Thank you, Madame Lalonde.

Mr. Shepherd, briefly.

Mr. Alex Shepherd: I still don't think we've really dealt with the issue of asset allocation. I think there's a big issue about how banks from a corporate planning structure are allocating their assets between the domestic economy and globally. That's a strategy, but I'm sure it has something to do with return on investment and the cost of due diligence in the small business sector.

What I would like to focus on is the Lightstone study, but also specifically an appearance before the task force on the future of financial services by Mr. Flood of the CIBC.

In your financial statements I note that your 1996 financial statements compared to 1994 reflect an overall increase in foreign lending of 45%, while your total assets have increased only by 25%.

You talked about the tourism sector. Yesterday, appearing before the finance committee, Mr. Tony Pollard, who is the president of the Hotel Association of Canada—an organization that represents 7,200 properties, employs 226,000 people, and contributes about $8.6 billion to the Canadian economy—stated that Canadian banks refused.... There's a whole acquisition policy, a merger policy, going on within the hotel and hospitality industry in Canada. Canadians are not getting funding from their financial institutions. The people who are buying into that sector are Americans and Asians, and the banks active in that sector are American banks.

Getting back to Mr. Flood's comments before the task force, he spoke about the importance of maintaining a unique Canadian industry in the area of financial services. How can that be so important when at the same time your banks refuse to lend to other Canadian sectors? That's one question.

The Chair: That's your only question. That's it; sorry.

Mr. Shaughnessy.

Mr. Kelly Shaughnessy: I'll answer on behalf of CIBC, Madam Chair, because Mr. Shepherd's question specifically referred to the bank's submission to the task force yesterday.

I think you'll find the growth in our foreign loans is a reflection of a global policy the CIBC has—and it goes back to Mr. Ianno's earlier point today—but in no way is it restricting our ability to lend money to small businesses in Canada. It is part of our reflection that our bank and all the banks at the table here must be able to service the global needs of our clients, whether they're resident here in Ottawa or whether they have, like Nortel, a business interest in the United States of America. We have a policy of meeting the needs of our clients on a global integrated basis.

At no point in time does the bank come to me and say, “Kelly, you can't lend any more money to small business in Canada because we're lending our money south of the border”, or something of that nature.

The thing I would dearly love to do is double our loans. We haven't done it. I want to see this bank lend more money to small business, but that is not because we're restricting any capital. There's no capital allocation whatsoever in our organization that restricts money to small business.

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Mr. John Leckie: I have a quick comment.

It might be aimed at the wrong financial institution. Maybe the question should be aimed at the insurance business. We're not allowed to do that. They are the long-term lenders because they collect premium income and it's dependable income and they can make 25-year loans against that industry. So it might be appropriate to direct that to the insurance industry.

Mr. Alex Shepherd: American banks are the competitor.

The Chair: Mr. Shepherd, we have two different banking systems. We're here to discuss Canadian banks today and what their record is.

Mr. Schmidt.

Mr. Werner Schmidt: Madam Chair, I'm not sure whether this question should be addressed to Mr. Lightstone or to the banking community. I'm referring to page 36 on the Thompson Lightstone study. It makes the Hongkong Bank look like the best bank in terms of granting full loan approval. The final loan approval rate is the best for them. Yet when I look at the actual numbers, it looks as if the National Bank has the highest percentage of loans that are only partially given. So the question in my mind is this. If a business applies for a loan and gets only a partial loan, partially the number it wants, is that business really helped? I think we have to answer that question.

Mr. Kelly Shaughnessy: To bring the question into focus, it might be worth while to ask Mr. Lightstone to comment on the sample size.

Mr. Werner Schmidt: That's wise.

Mr. Ian M. Lightstone: Definitely if you look at the Hongkong Bank numbers the sample size is only 50 respondents in this particular case. There is variance, and again this is due to sampling error.

If you look at loan approvals, and full approvals versus loan approvals that are only partial, again we notice that 93% of all loans are approved. The vast majority are approved in full. There is some variance by institution, but part of that may be due to sampling error.

Mr. Werner Schmidt: That still doesn't answer my question. My question was whether a business is helped if it gets partial approval.

Mr. Kelly Shaughnessy: I would think if a business gets partial approval it certainly is positive to the business. I think what we would have to reflect on, and I don't think this study does it, is whether it helps enough. I think that is your real question, Mr. Schmidt: does the business have sufficient to meet its needs and sufficient to achieve its goals?

Mr. Werner Schmidt: That's my question, then.

Mr. Kelly Shaughnessy: If the businesses replied positively to the questionnaire, the answer is probably yes, but that's an assumption on my part. I have no empirical evidence on that question.

The Chair: Mr. Peric.

Mr. Janko Peric: I have three questions. Where is the money coming to this small business loan account from? Why are the service charges still high? When are you going to reduce them? Finally, how do you feel about your profits?

Mr. Kelly Shaughnessy: There were a number of questions there, Madam Chair. If I understood the first one, it was where is the money to finance this sector coming from? It's coming from the deposit gathering and the wholesale funding gathering of the banks.

Mr. Janko Peric: From the general fund.

Mr. Kelly Shaughnessy: From general.

I believe service charges were the second concern. At our bank—and I would ask my colleagues to comment—when we have increased service charges to small businesses, and we have—and again, I can only speak for our bank—we have bundled a number of products and services. For instance, we bundled our electronic banking into a fixed fee option. I think that has brought value to the small business client.

I think your third question was whether it's profitable.

Mr. Janko Peric: No, how do you feel about profit?

Mr. Kelly Shaughnessy: How do I feel about profits? Very seriously, the Canadian banks are profitable today, but I think it is vital to our economy that the Canadian banks remain profitable. We are broadly owned. We are owned by probably virtually everybody in this room who has an RRSP or something of that nature. The Canadian banks are also major employers in this country today. It's our viability, our profitability, our employment capability. I think historically the size of the Canadian banking industry has been vital to this country's growth.

Mr. Janko Peric: Shared with Canadians.

The Chair: Mr. Pankiw.

Mr. Jim Pankiw: Thank you, Madam Chair.

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On the slide about key issues affecting small and medium-sized enterprises today, there is a rather shocking revelation that businesses had in total mentioned 10% of government bureaucracy and regulations. That's a little bit disturbing. I'm wondering if you or the banks have identified what those bureaucracy and regulations are and what the costs to small business are as a result of them.

Mr. Ian M. Lightstone: To get into that, we've grouped anything that was related to government into this code called government bureaucracy and regulations. I don't have the answer in terms of the specifics mentioned by people in the survey, but we can break them down further. That would be the only part I could answer to this.

Mr. Jim Pankiw: I would suggest that it be investigated further.

The Chair: Thank you, Mr. Pankiw.

Mr. Bellemare.

Mr. Eugène Bellemare: Service charges are a very contentious segment of your business. Many of our constituents complain that when they see that the service charges

[Translation]

appear on their financial statements at the end of the month, and they find them excessively high. It is almost usury.

The matter was already raised by my colleague. Do you intend to reduce these service charges that many people find very high? For example, senior citizens and very young people.

[English]

Ms. Anne Sutherland: Madam Chair, if I could respond to that, all of us have basic banking packages that we offer to consumers, to the degree of either $2.50 a month or $3.50 a month. Consumers can have access to a wide range of financial services. Also, all of us have student packages and all of us provide banking free of charge to individuals over 60 or 65. What this tells me is that we perhaps also need to do a better job of informing. On business service charges, not only have we frozen them, but some of us have lowered our charges.

I will tell you that we hear the same concerns. We have recently done considerable research with our clients to try to reconcile the difference for the 80% who said they think the service charges are too high. We mapped it against what their service charges were, and by and large companies felt they spend 60% more in service charges than they actually do. So that tells me again, both from a marketing standpoint and from that of how we bill our customers, that we are obviously not doing a very good job.

If I had a pat answer for you, I would give it to you, but we absolutely want to address that because we do not want to irritate our clients.

The Chair: Thank you, Mr. Bellemare.

I'm going to allow two more questions, briefly, from Ms. Brown and Mr. Ianno.

Ms. Brown.

Ms. Bonnie Brown: Thank you, Madam Chair.

First of all, I want to thank you for giving us access to you in between these meetings, when certain issues around financial institutions come up and we need to tap into your expertise. But I want to ask that you restrain your local managers from wanting to come to visit us and using up our very restrained constituency office time to lobby us about the issues you have already made clear to us.

I'm interested by Ms. Sutherland's points around the even greater importance of personal credit rating these days. I thought it was healthy that she alluded to the fact that some of these bad credit ratings begin with people who are very young. We've been very interested in bankruptcy here, and we are very concerned about the issuance of credit cards to university students. When they graduate, they sometimes graduate almost with a bad credit rating already, plus there are the payback obligations of their student loans.

Sometimes those two drivers drive them into bankruptcy. If not, if their parents manage to bail them out—as I have done—they still have it on their personal credit rating. Then, four years later, if they want to start a business....

So are you doing anything to restrain yourselves from issuing these credit cards to these people who have never been away from home before in their lives, who have never had credit—except with the Bank of Bonnie, as I call it? Now that you're playing into this personal credit rating a little more for your own business decisions, are you able to convince the people at the other end of the business, those who issue the credit cards, to have a better sense of responsibility about it?

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Mr. Kelly Shaughnessy: If I could make one recommendation, the whole subject of student debt, whether it's credit card or student loans, is a subject that I think we as an industry and I believe you as a government and you as legislators would want to discuss. I don't know if it appears before industry or what committee of Parliament, but it's certainly something to discuss.

Students today are graduating with far too much debt. It's overwhelming before they even get out of school. I don't know, Madam Chair and Ms. Brown, whether or not it is the credit card. I do believe it's the student loan that is doing it, for the most part. But as an industry, I think we would really like to pursue that further with the appropriate committee of Parliament.

The Chair: Ms. Sutherland.

Ms. Anne Sutherland: Very briefly, I would also acknowledge the fact that we, too, collectively as bankers but also speaking from my individual institution, are concerned about the issue. We would be very willing and welcome the opportunity to work with you as legislators to find solutions to this. Obviously it concerns us as well, because those are our future customers.

The Chair: You have one last question, Mr. Ianno.

Mr. Tony Ianno: As one quick statement, if it's possible, can you stick with the SME definition the banks have put forward, which is $1 million authorization possibility and $10 million sales, versus going to your 6% of $50 million, 500 employees? I don't need a comment on that, if you can just deal with that.

The one question I have is this. Mr. Shaughnessy, you alluded to loan-loss ratio, 1995-96. I have not see that on any of the documentation you've provided us. From the previous year, 1994-95, we had from the banks specific information that the loan-loss ratio for small and medium-sized businesses was less than for large businesses—and we don't want to go into Olympia and York and everything else that fits into the equation. So if you can give us that information, I'd appreciate that.

Thank you.

Mr. Dieter Jentsch: We'll get you the information. I think it's a good question.

The Chair: I want to thank everyone for coming.

As the chair, I want to make a couple of comments. I don't want to keep everyone longer, but I want to comment on Mr. McCallum's earlier comments on the mutual fund “woes of the bank,” as I guess he called it.

I would suggest, as I have suggested over and over with every bank I've met with in the past four years, part of the problem is there's an area of financial advice that banks are very slowly getting into, and that's why you've lost that growth in mutual funds, because people have turned to outsiders for that advice.

I'd also like to make the comment that although from Mr. Lightstone's presentation credit cards weren't necessarily...he suggested it didn't mean that banks were lending enough. For the 70% who pay on a monthly basis and pay the total balance, that's correct. For anybody who carries a loan on their credit card as a small business at a high rate when they should be using a line of credit, that means the banks aren't providing enough or there's a problem there.

So when we talk about a small business using credit cards to finance their business, I would suggest that the 30% needs to be looked at because that, to me, whether it's $1,000 or $5,000, is being carried at a high rate of interest when it should be carried on a line of credit that is at prime.

I thought Ms. Jennings' comments about race were notable.

What I'd like to suggest we will do as a committee is follow up from our meeting today with things we believe would be helpful for your next presentation, because I also know, as my first time chairing this, that we obviously need time just with the banks and time just with the survey. We thought we had allowed ourselves enough time with three hours. We obviously haven't, because I think this discussion could go on for a very long time and focus in on other issues.

I'd also like to make one final comment about spousal guarantees. I noted in the presentation from Mr. Lightstone that they've gone down or they're at a relatively low percent. But there's another category you are not including in that, or maybe you are, which is called spousal postponements. Are those included in spousal guarantees? Would they be included in that percentage?

Mr. Kelly Shaughnessy: Generally, it's one and the same document.

The Chair: No, it's not one and the same document. A spousal guarantee is when you guarantee the loan; a spousal postponement is when you postpone your interest in the business, which a spouse would be led to believe is not a guarantee of the business, which in fact is a guarantee. You've come up with this new term to convince spouses that they are not guaranteeing the business when in fact that's exactly what they're doing by postponing their claim.

I take exception to the fact that there are these two different definitions, and people who are not educated or not familiar in the financial business will not realize exactly what they're doing. There's no independent legal advice required for a spousal postponement, in a lot of cases, as there is for a spousal guarantee.

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I suggest that the banks could find themselves in great difficulty down the road by changing the format and going back to a court case in which there was no independent legal advice on a guarantee. You may have changed the terminology or you may have been using postponements for a long time, but from people who have had to sign them, I personally know they don't come with the same restrictions as guarantees. I think the banks may want to take a look at that.

We also know that the student debt and credit card issue that Mrs. Brown raised is of importance. We have had the student debt issue raised before us as part of our research study. I anticipate it will come back.

We will also be inviting you back, probably in the near future, as we didn't have a chance to discuss our year 2000 problem with you. We appreciate your fast facts summary, and I appreciate your patience today. I appreciate everyone taking this time, because I know your time is very valuable. The members appreciate your co-operation, and we look forward to your next visit.

I adjourn the meeting.