It's inevitable that lending costs for small businesses will be higher than that of larger businesses, the head of the Reserve Bank of Australia says.
Governor Glenn Stevens was asked at a parliamentary committee hearing about the discrepancy between the lending rates for larger business and smaller businesses and if it affects competition.
"The question is what do you do about that, it's inevitable that most small business are genuinely more risky by their nature," he said.
"You want to encourage that risk taking to a certain point but there is no getting around the fact that they are going to be more risky, and the price of credit from the banking system is and should reflect that."
He was also asked why the gap has widened between the cash rate and small business loan.
"I think its the case the actual effective rate paid even for small businesses has come down pretty much as low as its been at anytime in quite a while.
"It's true it hasn't come down as much as the cash rate."
Mr Stevens said getting home finance is easier than a small business loan because the risk assessment is more difficult.
"It's much easier to lend for mortgages, they're much more generic and its much easier to assess the risk.
"For small business they're more idiosyncratic it's a lot harder to do," he said.
"There's an inability for small business, very small business, to have the amount of collateral that a bank would like to have against a loan."
Mr Stevens said many small business use the family home as collateral.
"We may or may not like that fact, but that was a piece of collateral they had," he said.
"It's possible being in a world that the collateral they put up is not the same which could be a potential impediment."
