Australia’s non-bank lending boom

January 2018 | PROFESSIONAL INSIGHT | BANKING & FINANCE

Financier Worldwide Magazine

January 2018 Issue

Despite credit growth returning to Australia since the global financial crisis, long-term factors, such as the consolidation of banks and Basel III’s risk-weighted capital framework, continue to pose barriers for businesses looking to access funding.

Certainly, Australia’s oligopoly of banks has been well-documented. According to EY, almost 90 percent of corporate funding in the country is provided by just four major banks, compared with 54 percent in Europe and 16 percent in the US.

Fortunately, at least with respect to choice and terms, changing regulatory and economic conditions are paving the way for a number of non-bank lenders to enter the market, each offering competitive and flexible alternatives to traditional funding sources.

Banking environment

General economic resilience, coupled with a strong retail banking sector, meant that many consumers in Australia escaped the global financial crisis relatively unscathed. Yet, the same cannot be said for many corporates where the withdrawal of international wholesale funding from the banking sector, and the retreat of a number of European and American banks, resulted in reduced credit availability, especially for higher-risk SMEs and mid-caps.

In large part, this has been due to the introduction of capital requirements stemming from OECD banking regulations known as ‘Basel III’. Aimed at avoiding a future banking crisis, the regulations seek to increase the buffers of hard capital held by financial institutions worldwide.

While well-intentioned, rules for leverage and liquidity, risk-weighting requirements and compliance measures, such as anti-money laundering (AML) and know your customer requirements (KYC), have, in many cases, reduced bank appetite for lending. This is particularly the case with respect to trade finance.

The Asia-Pacific region is one of the most active trading blocs in the world. As such, the lack of available finance has hit corporates hard. According to the ICC Banking Commission, the region as a whole has the highest proposal rate (40 percent) and the highest rejection rate (34 percent) for trade finance. The result is that funding, for all but the most favoured, is becoming more expensive and less readily-available.

Beyond the bank

This is not quite the bad news it seems, however. The retreat of the banks has been coupled by the entry of a variety of non-bank lenders, particularly in the trade finance space. Furthermore, while Australia’s alternative finance industry was initially slow to take off, it is quickly becoming a regional leader.

Across Asia-Pacific, these non-bank or alternative lenders generated a total market volume of US$245.28bn in 2016. And after China, Australia has emerged as the second largest market in the region with a volume of US$610m in 2016, a sizable increase of US$212m from 2015.

Innovative, flexible and responsive, not only are these new players plugging a vital gap in the market by addressing the under-served corporates, they also provide them with a welcome opportunity to diversify their funding by embracing new ways of doing business. In fact, now more than ever, companies can access a wide variety of solutions, preventing them from ‘putting all their eggs in one basket’.

Playing a key role in the growth of the Australian economy, new lending options, such as peer-to-peer lending, balance-sheet, invoice trading and crowdfunding are providing businesses with a much-needed alternative to traditional banking.

This also extends to specialist financiers, many of which have been expanding geographically and broadening their product ranges. Indeed, in a market dominated by larger institutions, specialist financiers, by virtue of their size and commitment to a client-centric approach, can work quickly to put together flexible solutions tailored to specific business needs.

In Australia in particular, the need to increase competition in a highly concentrated banking sector is one that has gained greater political support, in turn contributing to a favourable regulatory environment for specialist lenders.

It helps that specialist lenders have clear advantages in areas of critical need, such as trade. Having operated in emerging markets for a number of years, specialists often possess both the in-depth local knowledge and the extensive networks critical to exporting success. For Australian corporates engaged in trade, or looking to export for the first time, this is a particularly important factor to consider.

Moreover, unlike banks that primarily focus on counterparty risk, specialist financiers take a transactional approach. This allows them to offer imaginative structures such as inventory or accounts receivable financing, helping exporters by looking beyond the credit risk on enabling businesses to pursue their expansion agendas.

It is for these reasons that increasingly specialist financing and other newly-established financing vehicles are rapidly becoming mainstream options for corporates looking for more innovative and flexible ways to finance their growth.

Emma Clark is head of marketing & corporate affairs at Falcon Group. She can be contacted on +44 (0)20 7337 6200 or by email: emma.clark@falcongrp.com.

Emma Clark

Falcon Group