Sector lending peaked at $26 billion in 2007. By 2013, it had shrunk to around $10b. Lending from non-bank sources is now up to about $17b. That pales against the balance sheets of the banking sector who have loans of $487b, including $215b owner-occupied property, $81b residential investor property, $8.6b consumer loans, $109b business loans and $62b of agriculture lending.
The non-bank sector is coming off a low base with small market share, apart from the consumer market where non-bank lending is $6.2b.
The past year has seen some strong growth in lending from non-bank sources.
Agriculture lending is up 86.7% in the past year and 152% in the past three years, though still small in overall size.
Business lending is up 36% in the past year ($1.8b) and 52% ($2.4b) in the past three years. The nominal numbers are still small relative to the bank balance sheets. Non-bank lending into agriculture was $689 million at the end of 2020 and non-banks provided $7b of business funding.
Non-bank lending is typically specialist lending, the type of lending bank cannot or will not offer.
The growth now also personifies a substitution away from more traditional bank sources of finance. Some of which has been the need to refinance if the bank plays tough.
Bank lending into the agriculture sector has fallen 1.4% in the past year, dominated by falling debt across the dairy sector. Business lending dropped 5.2% ($6.7b).
Non-banks have picked up part of the slack as banks tightened credit criteria forced people to look at alternate providers.
Low-risk housing lending has dominated growth across bank balance sheets in the past year, rising 8.2%. However, even in the housing space, non-banks are showing stronger growth of 11.5%, as people seek alternate providers for deals that do not fit the automatic decision box of banks and need a bit of pragmatism.
Of course, we have seen this play book before when non-bank lending rises rapidly. Non-bank lending rose $7b from late 2004 to mid-2007, half of which was housing related. The endgame when interest rates moved up was not pretty.
The Reserve Bank will be alert to signs of excesses. Government regulators should too in relation to various deferred payment schemes.
The real story though is that the non-bank growth reflects a changing market. We are likely to see, and need, continued growth in alternative providers of finance. Access to capital is essential for growth.
Banks account for 94% of private sector borrowing and the large four account for 85% of that lending. That is a large concentration. Around two-thirds of bank lending is to the household sector, the bulk of which is secured against housing assets. Of $109b lending by banks to businesses, 37% is property related.
Access to capital is an issue for businesses, but also a problem across the economy.
Alternate providers of capital are inevitable, and they will need to be appropriately regulated.
The big four bank dominance will fade. Open banking – a secure way to give providers access to your financial information, which will help customers, farmers and small-to-medium sized businesses get a better deal – needs accelerated to increase competition.
The Governor of the Reserve Bank has made some firm comments on housing and the importance of diversifying. Housing dominates investors’ mindset. One reason has been the ability to leverage and access debt. Changes look to be coming to remove some of that advantage. That is long overdue.
There is no shortage of capital in NZ looking for a place to invest. The challenge is how we channel it from A to B, and direct it into the productive sector including agriculture. Non-bank providers, appropriately regulated, are a growing part of that landscape, if they can get the pricing right. The onus is also on the borrowers to get their bankability in order so they can access good pricing.
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