A non-bank lender is a lender who is not a bank, building society or credit union, but one that has its own source of wholesale funds and lends those funds out with an added margin for profit. Since non-bank lenders do not take deposits they are not regulated by APRA as the banks are but they are regulated by for example ASIC and the National Consumer Credit Protection laws.
Private credit funds such as Wentworth Williamson Stable Income Fund seek to earn income yield for investor clients by being a source of wholesale funds to non-bank lenders.
The Australian non–bank lending market is significant, rapidly growing and increasingly of systemic importance. A brief look at the members of the Australia Finance Industry Association (AFIA) or Fintech Australia gives some idea of the momentum in this sector. Some broad comments on market size and sectors are set out in the table below.
|Some well-known names
|Commercial real estate
|Non-banks are expected to fund $50bn of commercial real estate by 2024 (total bank lending in that sector is now $260bn)
|Think Tank, Qalitas, La Trobe
|Non-banks were estimated to have 5% of the residential mortgage finance market in 2019 . Since this is a $1.8 trillion market, 5% is substantial at $90 bn
|Resimac, Athena, Bluestone, Columbus, Pepper Money, La Trobe, AFG
|Statistics on the provision of credit by non-banks in the form of consumer and SME loans are harder to come by, but given the explosion in the number of these providers we can safely the assume the market size is substantial and growing
|Latitude, Pepper Money, Wisr
|Get Capital, On Deck, Moula, Prospa
|Asset leasing / finance
|Metro Finance , Allied Credit
|Insurance premium funding
|Scottish Pacific, Octet, TIM Finance
|Residential rent to own, specialised inventory financing,
Market development is being fuelled by the convergence and mutual synergy of two important trends:
- For many years, as has been well–documented, Australian banks have been either withdrawing from certain sectors or have not provided borrowers in those sectors with the service or risk appetite they require. SME borrowers and residential mortgages are two sectors where this trend has been particularly strong; and
- FinTech has enabled non–bank lenders to provide efficient speedy accessible transaction and lending solutions to both SME and consumer lenders
The increasing systemic importance of the sector has been clearly acknowledged by the Australia government in two important ways. $2.3bn was advanced to the sector via the Structured Finance Support Fund administered by the AOFM to ensure wholesale funding markets for non-bank lenders remained open through the tough Covid lockdown times of 2020. The SME guarantee schemes also provide significant support to the sector – the second scheme guarantees 50% of the risk on eligible loans originated by eligible lenders from 1 October 2020 to 30 June 2021.
The non–bank lending market now comprises borrowers with size and scale in residential mortgages, SME lending and asset finance as well as numerous up and coming businesses in these sectors and others requiring more niched financing approaches.
Non–bank lenders generally use either private warehouse or public securitization funding for the wholesale funding of their receivables. These structures typically have banks providing the senior debt, institutions and private credit funds providing the mezzanine and junior debt and the originator providing the equity. It is perhaps odd that banks fund non–bank lenders in this way but the senior debt in these structures is capital efficient for them and provides a pathway to other banking services for the bank to the non–bank lender. The mezzanine and junior debt tranches provide attractive opportunities for private credit funds and institutional investors to earn income yield for their clients.
Our approach to add value for our clients is to identify niche non-bank lenders operating in sectors where we believe the underlying borrowers have a structural propensity to pay and the management team of the non-bank lender have an extensive track record in the business. The first partner we have selected is Credabl, a leading financier of medical professionals. We provide them financing for their loan receivables, primarily via a tranched structure where we rank ahead of their equity but behind their other funding. They have in excess of 1600 medical professional obligors all personally liable for the loans advanced and with security over the assets financed. Given the responsible nature of the medical professional obligors and the underwriting policies and procedures followed by an experienced management team the underlying portfolio has experienced zero defaults since inception in 2018. This results in the BBSW +7% we are able to earn from this funding achieving an excellent risk adjusted return for our clients.
We are also continually researching the market for other specialised and next generation niche non-bank lenders that meet our risk and return criteria. Given the growth in the market, we believe there is ample opportunity.