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How does the PPSR benefit Australia?

 

Gavin McCosker, Registrar

Contents

  • In theory

  • In practice

  • Increased transparency

  • Benefits

In theory

According to economic theory, secured transaction regimes shouldn’t deliver any benefits at all. The Final Report of the Personal Property Securities Act Review explains:

“If one creditor [lender] is able to offer more competitive terms because it has reduced its risk by taking security, the risk to other creditors will have correspondingly increased. In theory, this means that those other creditors should want to reduce the amount of credit they are prepared to make available, or to increase its cost. As a matter of mathematics, this should be a zero sum game – the advantages produced by secured credit should be counter-balanced by the corresponding detriments to the debtor’s ability to raise unsecured credit. This means in theory that debtors [borrowers] should be at best indifferent to whether or not they use secured credit.”

In practice

However, we know that borrowers are keen to use collateral to secure their loans because it gives them much better credit terms. According to the International Finance Corporation (IFC), in industrial countries, borrowers using collateral get nine times the level of credit, repayment periods up to 11 times longer and interest rates 50% lower than borrowers without collateral.

At the same time, credit is more available in countries where security interests are perfected and a predictable priority system exists for lenders in case of default. In fact, the IFC estimates that in these countries, credit to GDP averages 60%, compared with 30-32% average for countries without a clear creditor protection system.

This is why almost all advanced economies maintain secured transactions, or personal property securities system and many developing economies are implementing them.

Increased transparency

This mismatch between theory and practice may come from the fact that when it comes to making financial decisions, nobody has perfect information. Australia’s Personal Property Securities Register (PPSR) delivers real value by filling this information void—not just for lenders, but for anyone entering into a transactional arrangement.

For example, if a small business has doubts about whether a new customer is creditworthy, they can check the PPSR to see if other companies have security interests against the customer’s assets. And if a consumer is buying a second-hand car, they can check the PPSR to make sure no one else (perhaps a finance company) has registered a security interest in the vehicle. That way, they can be certain the car won’t be repossessed.

These are a couple of examples of the ways an effective personal property securities system can increase transparency. In a transparent system, potential suppliers and creditors are more willing to enter into agreements, because they’re better able to assess the risk of dealing with a particular individual or business.

Benefits

So, have we seen these benefits flow through to the Australian economy since the PPSR went live?

To answer this question, we need to recognise that the PPSR did not establish a secured transaction regime in Australia. Instead, it consolidated a previously fragmented and decentralised system.

Many of the benefits of a personal property securities system already existed. But they were housed in complex sets of rules scattered across more than 70 Commonwealth, State and Territory statutes.

By replacing these with a single set of rules, applied through a national, online system, the PPSR is delivering:

  1. Increased certainty – the rules are applied consistently and predictably, making it easier for borrowers and lenders to manage risk and make informed decisions about transactions.

  2. Better access to credit – the register allows businesses and consumers to use a far wider range of collateral—basically all types of personal property—to gain access to credit. Over time—as grantors and secured parties seize the opportunities this presents—the PPSR will continue to support and grow the flow of capital through the Australian economy.

  3. Digital enablement – As an online service, the PPSR is enabling Australia to keep pace and further enable an increasingly sophisticated financial sector that relies on real-time information sharing in a 24-hour economy.

I hope you found this informative—until next time when I will discuss the key components of an effective PPS system.

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