Non-bank growth sparks call for greater oversight

In his analysis of the latest data from the Reserve Bank of Australia (RBA) and the Australian Prudential Regulation Authority (APRA), principal of Digital Finance Analytics (DFA) Martin North observed an increase in owner-occupied lending from non-banks of 17 per cent in the 12 months to 31 January 2019, compared to growth of approximately 5 per cent from the ADI sector.

Additionally, Mr North observed that investor lending via the non-bank sector increased by approximately 4 per cent over the same period, compared to 1 per cent through the ADI channel.

Speaking to Mortgage Business, Mr North said that demand for credit from non-bank has been fuelled by the absence of regulatory constraints imposed on ADIs.

“[Non-banks] don’t have capital controls and constraints that the major banks do, so whilst they have the same responsible lending obligations, I think it’s fair to say that they're probably in an easier situation compared to the major banks in particular, and the banks more broadly,” he said.

The analyst also pointed to DFA’s own research, which involves an ongoing survey of approximately 52,000 households, stating that many borrowers are seeking finance alternatives from non-banks after being rejected by ADIs.

Mr North expressed concern over the non-banks’ funding streams, which said largely derive from hedge funds, international investors and wealthy local investors. 

While acknowledging that APRA assumes some responsibility for oversight of the non-bank sector, Mr North called for greater regulation of non-bank lending activity, claiming that the current trend resembles pre-GFC conditions.

“I [draw] parallels to what happened in 2006 in the US, where prior to the GFC, there was a big spike in non-bank lending in the 18 months up towards the crash,” he said.

“We are following the same path to an extent.”

The DFA analyst continued: “I’m sure that some of the non-banks are doing great job and are doing appropriate underwriting analysis, and they’ve probably got more flexibility in their models compared to the banks, but I’m just worried that there will be examples where people are getting loans they probably shouldn’t get.”

Mr North also noted that higher mortgage rates offered by non-banks could add further pressure on households if market risks mount.  

“While some of the non-banks have very good rates, a lot of people are having to pay a lot more for loans from non-banks,” he said.

“It’s certainly something I think needs closer [observation].”

Mr North concluded: “Lending standards amongst the ADI sector are probably not going to loosen any time soon, [so] we’ve got to take account of the non-bank sector, and there needs to be appropriate regulation, and I’m not sure we’re there yet.”

The RBA has also expressed concern of the rise in the non-bank sector, stating that growth in non-bank lending could pose “stability risks”.

[Related: Non-bank rise could increase stability risks]