* Australia to remove 'responsible lending' laws for banks
* Changes to ease credit access, reduce red tape
* Banks welcome the proposals, shares surge
* Consumer groups warn loosening could cause more harm (Recasts, adds consumer groups reaction, analysts)
By Paulina Duran and Renju Jose
SYDNEY, Sept 25 (Reuters) - Australia said on Friday it would ease lending standards for banks in a move designed to free up credit and revive the economy, which slid into its first recession in nearly 30 years due to the coronavirus pandemic.
Shares of Australia's "Big Four" banks rallied after the announcement but the move, which needs legislative approval, has attracted criticism from consumer groups and analysts who say the relaxed laws water down protections designed to reduce financial risks.
Australian Treasurer Josh Frydenberg said the changes will ease the regulatory burden and cut the cost and time faced by consumers and small businesses seeking to access credit
"The flow of credit will be absolutely critical to our economic recovery," Frydenberg told reporters in Canberra. "But our current regulatory framework, with respect to lending...has become overly prescriptive, and responsible lending has become restrictive lending."
The changes remove responsible lending laws introduced in the wake of the global financial crisis that, among other things, require banks to check whether information provided by borrowers in their loan applications is correct.
They also follow other stimulatory measures such as government guarantees for bad debts and cheap funding lines from the central bank.
Australian banks had tightened lending practices following a government-led inquiry, known as the Royal Commission, which found lenders were approving loans to people that could not repay them. But the need to stimulate the country's economy has led lawmakers to now relax their tough stance.
"Before the Royal Commission banks had very poor reputations and after the Royal Commission it got worse because it showed that they've been lending quite irresponsibly," CLSA senior banking analyst Brian Johnson said.
"Now what we are seeing is politicians ... basically embracing what it previously would have called irresponsible lending."
Banks and investors cheered the news with National Australia Bank NAB.AX and Westpac Banking WBC.AX shares rising over 6%, while Commonwealth Bank of Australia CBA.AX was up more than 3%. Australia and New Zealand Banking Group ANZ.AX rose 5%. That helped lift Australia's benchmark index .AXJO more than 1%.
"This is a significant government initiative that will reduce red tape for consumers seeking a loan and importantly speed up the process for customers to obtain approval for a loan," Westpac CEO Peter King said in a statement.
Consumer advocates have criticised the plan, however, arguing it removes existing protections and would cause more harm to people and the economy.
"Watering down credit protections will leave individuals and families at severe risk of being pushed into credit arrangements that will hurt in the long term," said Karen Cox, CEO of Financial Rights Legal Centre.
JPMorgan (NYSE:JPM) said while changes might cut costs and boost cash earnings in the short term, runaway growth in household credit would be a concern, even though the pace of such growth was still very modest.
"We caution that Australia is starting with amongst the highest household gearing in the world," it said.
($1 = 1.4192 Australian dollars)