NZ banks say 'no' more often, driving customers to non-bank lenders

Monday, 16 December 2019

The Reserve Bank is putting pressure on banks to hold more capital.

Banks saying 'no' more often to would-be borrowers has driven massive growth in the non-bank lending sector, says KPMG in its survey of non-bank lenders.

Record demand for loans, and a surplus of funding from investors looking for a decent return, saw the non-bank lending industry post 9.32 per cent growth in 12 months to the end of June, said John Kensington, head of banking and finance at KPMG.

The biggest area of growth was non-bank mortgages, but there was also continued growth in non-bank personal loans.

Buy now, pay later has now taken hold helping drive growth in the non-bank lending sector.

'This appears to be driven by both a continued tighter banking 'black box' as well as flat house prices, restricting people's ability to put their new lending 'on the mortgage',' Kensington said.

**READ MORE:

* The SOS guide to killing debt

* Debt lessons from a young woman who drowned in debt

* Reserve Bank's '$20 billion' decision on bank capital may flow through to mortgage rates**

Mortgages are the fastest growing area of non-bank lending as banks say 'no' more often to would-be borrowers.

Non-bank mortgage-lending grew to just short of $3b, up by over 16 per cent from the previous year, and profits across the sector were up by just under 17 per cent, KPMG reported.

Non-bank lenders had taken advantage of banks becoming more risk averse as they adjusted to the 'new normal' for conduct and culture, following the Australian royal commission into banking misconduct, and as a result of the Reserve Bank's push to get banks to hold more capital.

Banks' reluctance to lend to some people was leading in a rise in would-be borrowers seeking out an 'other significant financier' to help them fund their spending, said Kensington.

The non-bank lending industry was also benefiting from low levels of bad debts thanks to a strong economy and the lowest unemployment for 11 years.

Lower interest rates had increased people's ability to service higher levels of debt, but flatter house prices was probably dampening some people's willingness to borrow to spend.

'For home owners it is likely concerning that the value of their property could decrease, which could also be aiding the feelings of economic uncertainty and hesitation to spend,' Kensington said.

Also contributing to the rapid growth of non-bank lending was the rise of buy now, pay later (BNPL) finance, which let people make consumer purchases by incurring debts they repaid in set instalments.

BNPL financiers like Afterpay did not charge interest, but there were penalty fees for debtors who miss payments.

The rise of BNPL finance was partly the result of the rise of 'generation now', Kensington said.

'The desire to both have and do everything now, and the general acceptance of debt as a way of life, have created a very favourable environment for BNPL services to thrive in.'

'Consumers are choosing to use BNPL over credit cards to buy necessary or luxury items they could not normally afford, stagger spending, avoid increasing credit card debt, and managing budget surprises.'

Buy now, pay later (BNPL) is enabling peo[ple to buy things they haven't saved for.

But there were dangers, he said.

'In some scenarios, this is causing some customers to no longer be able to make their minimum credit card repayments, and therefore, making it harder for credit card providers/banks to comply with their own responsible lending requirements, even though it was not directly their debt repayments which caused the issue.'

In Australia, he noted, one in six users of BNPL had either needed to delay bill payments, or had become overdrawn, or borrow more money, to service their BNPL debts.

New Zealand regulators had yet to say whether this was a problem in New Zealand, and how they would respond to this threat.

BNPL was not governed by consumer lending laws, but that could change, Kensington said.

Non-bank lenders were facing tougher regulations as a result of the government prioritising the reduction in high-interest lending, and more change could be on the way.

One aspect of lending that had been banned in Australia and the UK, but had not yet been banned in New Zealand were 'flex commissions' where lenders gave the likes of car dealers wholesale rate loans they could on-sell to buyers, allowing the dealers to choose the 'margin' they put on each loan. That meant similar customers could be offered very different loan interest rates.

'Given the adverse, or unfair impact that flex commissions can have on the end consumer, it may be only a matter of time before this arrives here,' Kensington said.

**BIGGEST NON-BANK LENDERS

*** UDC: Owned by ANZ. Had $3.44b in loans at the end of June.

* Avanti Finance: Privately-owned finance company with $1.05b of loans.

* Toyota Finance: Huge funder of car purchases with $972m of loans.

* Flexigroup: Most famous for Q Cards and Farmers cards with loans of $761m.

* Motor Trade Finance: Financier of many car loans with loans of $694m.