How big is the funding gap?
The recent crackdown by the Australian Prudential Regulation Authority (APRA) and Government to try to curb lending to overseas investors has resulted in a funding gap for businesses and individuals. Historically, this would have been covered by the major banks. However, in an endeavour to strengthen balance sheets and ensure its financial security, these institutions have increased its capital requirements for lending—resulting in restrained lending in certain lending areas and certain industries and sectors.
Unable to seek funding or meet new stringent lending requirements, certain parts of the economy are missing out on major bank funding, and the alternative funding market and private lending space is filling this gap.
APRA is primarily driving these requirements with its incessant implementation of strict lending rules and increase of the major banks' liquidity requirements. It also appears, as seen in the recent Murray Inquiry, the need to increase capital requirements will continue for some time.
The Australian private funding market is extremely narrow with almost 90 percent of debt being funded by the banks and with lending at historic lows debt is cheap, causing concern on the regulator around riskier lending.
By global standards, this concentration of bank lending is extremely high. In Europe the major banks only have approximately 50 percent of the lending market while in the U.S. it is as low as 16 percent. Clearly, lending in Australia appears to raise concerns of market risk should a failure of a major bank were to occur. However, it is of value to note that the four major banks are still some of the strongest banks financially in the world and therefore a failure is unlikely.
Whether this has led the regulator to ensure the major banks tighten their lending belts or whether other economic factors are causing APRA's strict lending rules is unclear. What is emerging though is a clear recognition of the significant gap in meeting businesses' funding demands. Private lenders and financiers are quickly stepping up to meet this gap and are, in some instances, even struggling to meet demand. The online market is flourishing with significant online lenders partnering with a major bank to provide unsecured lending. Other private lenders often consist of a variety of high net worth individuals, investor funds, and overseas bondholders.
Should you, or your client require access to these private lenders, Worrells have invested significant time in identifying various funders that suit borrowers' different needs. Please do not hesitate to call your local Worrells Partner.