BankingOpen BankingAustralia’s non-bank lending boom

Australia's non-bank lending boom

Australia’s alternative lending market continues to grow as banks struggle with regulatory constraints. Paul Mitchell, managing director Australia for specialist financier Falcon Group, explains.

Despite entering its 25th recession-free year and avoiding much of the economic turmoil that has defined the world economy for the past decade, Australian banks are not exempt from the tightening of regulations affecting banks globally. Consequently, many Australian borrowers have been on the wrong end of bank lending decisions. They have become concerned that banks cannot cope with the increasing demands from corporates in Australia.

As a result, gaps have appeared in the market for corporate finance, which specialist lenders are primed to fill.

Why are banks struggling to meet corporate needs?

Australian banks are notoriously prudent when it comes to lending and it is partially down to this reason why they emerged unscathed from the 2008-09 global economic crisis. However, tighter banking regulations were introduced in the aftermath of the crisis such as anti-money laundering (AML) and Basel III. In conjunction with the rest of the world, Australian banks are having to become increasingly selective when it comes to lending money.

Although these regulations intended to improve the stability of the global financial system, increased capital requirements, as well as the introduction of leverage and liquidity ratios, Australian banks have become more reluctant to lend to all but their core relationship corporates.

Certainly, they have become more reticent with respect to structured transactions – perhaps including taking security over assets or stock. Like their global peers, Australian banks have become more tenacious with their major relationship corporates – meaning those that present less long-term risk.

Yet this leaves a substantial – and unmet – demand for financing in the country, especially with regard to trade and commodity finance and for borrowers not qualifying under the ever-tightening credit restrictions of the banks.

It is for this reason certain industries, such as agriculture, are struggling to obtain funding. The agricultural sector is one of the largest contributors to national GDP growth, but long-term farming industry projects do not provide banks with sufficient security to meet regulatory hurdles leaving the sector largely unfunded.

Another area critical for the economy is trade, which is also cash-strapped in many highly-financeable instances. The trade boom in the Asia-Pacific region has been well documented and is contributing more to global growth than the US or Europe. Australia home to some of the world’s most innovative businesses across the technology, infrastructure and outsourcing industries and by 2020, the region is expected to make up more than 35% of the global economy. Although this is a bright prospect, the region continues to have both the highest proposal and the highest rejection rates for trade finance globally, making it difficult for Australian companies to finance opportunities in their own backyards.

The non-bank lender appeal

Alternative finance providers are stepping in, offering corporates a more diversified approach to financing their needs.

Such lenders are increasing in demand. In 2016, the alternative finance market grew to a total volume of $245.28bn across the Asia-Pacific region, with the Australian market alone standing at $610m – overtaking Japan to become the second largest in the region.

Although there is rapid growth of alternative lenders in Australia, the market has been slow to adapt. These institutions often fund projects that traditional banks have been otherwise reluctant to take on, indicating they may have weaker lending criteria. In fact, they are taking on deals which banks are unable to do because of regulations. Because alternative lenders don’t depend on the deposit taken from the taxpayer, they feel less so the pressure of the regulator.

These non-bank lenders, through offering personalized and innovative financing services, are a welcome alternative to traditional banking methods.

Alternative financiers can offer corporates a simplified, transactional approach to borrowing, which enables them to offer different structures, such as asset-backed and accounts receivable financing and often localized service.

They also have a higher tolerance for risk, are more flexible and often have a crucial understanding of the sectors they operate in – especially in trade finance and emerging markets.  While they are free from the pressures weighing down traditional banks, these specialist financiers have both the financial and sector expertise to offer products suited to specific professional needs.

Compared to other big economies, however, the Australian alternative lending market has been slow to develop. When foreign banks withdrew during the financial crisis, the Big Four plugged market gaps, meaning non-bank lenders were unnecessary to ensure economic survival. 10years later, the alternative finance is driving the development of key parts of the Australian economy.

 

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