- April 16, 2020
- Posted by: Mani Parthasarathy
- Category: Banking and Finance
The lending industry typically consists of banks and other financial bodies that operate by providing financial support to the borrowers in return for a mortgage. This industry is a rapidly growing one predominantly due to the rise in the cost of living and also due to the constant increase in the needs of the population. At the same time, this industry has matured well in recent times. Parameters such as interest rates and brokerage rates have been set appropriately and managed well by the Reserve Banks across the globe. Most importantly, this phenomenon is not limited to just developed countries like the US or Australia and is found even in developing economies like India.
In a country like Australia, the lending industry has been intricately weaved after carefully analyzing the prevalent economic and market conditions. Australia is a key market for the global lending industry as it is one of the fastest-growing economies amongst all the developed nations. In fact, Australia is the only country amongst developed nations with uninterrupted economic growth for the past 27 years. Not even the US or the UK had achieved this. This staggering feat is primarily attributed to Australia’s strategic location near the financial powerhouses of Asia such as Singapore and Hong Kong, a solid economic foundation and the fact that some of the top companies of the world have established their presence here. All these factors have significantly contributed to the growth of its economy today and will do so in the future.
The lending industry used to be dominated by the banks previously in Australia. But the industry has become more competitive in recent years thanks to the sudden influx of various non-banking lenders and Mutual Banks. On the positive side, these financial bodies have supplemented the banks well to ensure that every individual in the country can borrow without any hassles.
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The Strength of Finance Industry in Australia:
Australia has one of the most sophisticated and profitable financial sectors in the world aptly aided by a strong regulatory system. The World Economic Forum Financial Development Index of 2012 rated Australia as one of the best performing financial centres due to the strength of its financial intermediation and financial stability.
Some of the factors contributing to the stability of the financial sector in Australia are highly skilled and multilingual workforce, a mandated retirement savings scheme and advanced business infrastructure.
According to Statista, the finance industry is the most significant contributor to the GVA of Australia at 9.5%. GVA or the Gross Value Added is the total value of all the goods and services produced in a country. It is the output minus intermediate consumption. Statista also states that over the past decade, the contribution of the finance industry to the GVA has shown a steady incline. In 2009, the finance industry was valued at 85,192 million AUD while in 2018, it was valued at 112,859 million AUD.
The contribution of Financial Services in the Small businesses of Australia is also quite significant. A report states that nearly 9.3% of the total employees of small businesses work in financial services. This is quite a huge sum of people in a country that is dominated by small businesses. The same report states that nearly 98% of the total businesses in Australia constitute small businesses.
Lending industry in Australia – Current Trends:
Some of the trends emerging in the lending industry of Australia are as follows –
- There are strong indications that the lending market will be dominated by alternative lenders in the coming years, thanks to the market risk capital requirements set for banks by the Basel Committee and also the recent findings of the Royal Banking Commission about the banks’ misconduct.
- In 2018, the lending industry was dominated by a powerful syndicated loan market in Australia. There was significant support for investment-grade credits which was available on a large scale and fanned across multiple sectors. The massive volume of underwritten loans and a stable market were some of the key features during this period.
- In 2019, there was a sudden surge in the number of Asian banks expanding their operations in Australia, and there was a spike in the participation of institutional investors. During this period, the lending market was extremely stable and robust, especially for corporate borrowers. This trend was quite visible in the refinancing of Australia Pacific LNG, which was nearly 100% oversubscribed that led to better terms and pricing.
- However, during the same period, the syndicated lending dropped by nearly 40% even though the industry was quite stable. The possible reason for this sudden drop could be the trade war between the US and China that made the borrowers play a wait and watch approach.
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The Role of Banks in the Lending Industry:
The banks constitute the most significant part of the lending industry in Australia. All the banks, along with Credit Unions and Building Societies, were collectively referred to as ADI (Authorized Deposit-Taking Institutions). However, in recent years, the Credit Unions and the Building Societies have rebranded themselves as Mutual banks. Also, a consolidation of many Credit Unions has reduced the count of ADIs in the country.
The banking industry in Australia has been traditionally dominated by 4 top banks viz. The Commonwealth Bank of Australia, Westpac Banking Corporation, National Australia Bank Limited and Australia and New Zealand Banking Group Limited. These banks hold more than half of the total assets of the country but constitute only a tiny part of the ADIs.
In late 2017, nearly one-third of the commercial lending was handled by the banks in Australia. This is a reduction of nearly 50% from the previous decade. This is mainly due to the increase in government debt securities purchased by the bank and also due to the rise in the borrowings of the federal government. The reduction was also attributed to the increase in lending to individuals instead of businesses across the country.
Banks are also an essential source of financing for the agricultural sector in Australia. The banks held almost the entire rural debt in 2017 with a minor portion of it held by other non-banking lenders. Some everyday lending products sold by the banks to the agricultural sector are revolving credit facilities and fixed-term agri-business loans.
Bank lending also plays a significant role in financing for most of the SMEs in Australia. Some of the common facilities sought by these SMEs from banks are overdrafts, property mortgages, long term loans, etc. The Reserve Bank of Australia states that Australian banks account for nearly 80% of the lending to SMEs as opposed to just two thirds for large businesses.
The Role of Non-Banking Lenders:
Non-banking lenders have an essential part in the lending landscape of Australia. They are lenders who are typically not a bank, but source funds from a bank at wholesale rates and with an added margin lend them to the borrowers.
Banks are withdrawing themselves from lending to borrowers who wish to mortgage assets that are non-income generating. The primary reason for this is the high capital requirements for managing the lending process and the lack of sufficient returns while giving loans to such borrowers. This leaves a big gap in the lending industry. Non-banking lenders have utilized this opportunity well and are trying to fill this gap by providing loans even for the non-income generating assets.
Some of the reasons why the population prefers non-banking lenders over banks for their loan needs are better customer service and better flexibility in handling the loan process. This is mainly because these non-banking lenders are much smaller as compared to the banks. As a result, they can manage their customers way better than the banks. Also since these non-bankers receive funds at wholesale rates, they can provide loans to the customers at a lower interest rate than banks. For instance, SocietyOne, a non-banking lender offers loans at 7.5%, while the interest rate of the large banks ranges anywhere 10% to 13%. Such non-banking lenders also lend to high-risk borrowers such as self-employed people unlike the banks that seldom offer to such an audience.
On the other hand, the non-banking lenders have their fair share of disadvantages. Since they are small in size, during the times of unstable economic conditions, they are more vulnerable to collapse compared to the massive banks.
Even though the share of non-banking lenders is quite less currently in the Australian market, this figure is only going to grow in the coming years owing to the recent scams that the banks have been caught in. A recent study has pointed out that the market share of the banks has experienced a 6% fall while non-banking lenders nearly doubled their share from 5% to 11%.
The Role of Brokers in the Lending Industry:
An overview of the Australian lending industry will be incomplete without mentioning the role of a broker. Brokers act as a bridge between the lenders and the borrowers and provide loan consultation services to the latter. Brokers suggest multiple lenders to a borrower, unlike the lenders who will not suggest their competition. A study points out that the mortgage broking industry in Australia accounts for settling nearly 55.7% of all the residential home loans as of September quarter in 2017. The borrowers are also extremely satisfied with the services of their brokers. A survey conducted by the Adviser states that nearly 96% of the borrowers were either satisfied or extremely satisfied with the services of the mortgage broker while only 67% of those who directly dealt with the lenders were satisfied or very satisfied.
The Role of Fintech in the Lending Industry:
Fintech or Financial Technology is a technology that has the primary purpose of improving the use of financial services across the world by automating various processes in it. Fintech assists businesses and consumers to better manage their financial operations by using specialized algorithms that are used on computers and smartphones.
The role of Fintech in the lending industry is to mainly improve the customer experience, streamline the documentation process and lower the overhead. Before the advent of Fintech, the mortgage activity was quite a cumbersome process for both the lenders and the borrowers owing to the huge amount of data involved in such transactions. Fintech helps by automating most of these tasks and in the process, improves the customer experience owing to a faster disbursement of loans and also reduces the possibility of human errors for the lenders.
The Fintech sector has shown a meteoric rise in recent years in Australia. The number of Fintech companies in Australia has shown a five-fold increase in the last five years. Another factor to consider is the emergence of various startups in the Fintech sector of Australia adding to the quality and quantity of the finance sector in general.
New South Wales is the Fintech hub of Australia as nearly half of all the Fintech companies are located here. However, most of the Fintech companies are also expanding overseas and in fact, Australian Fintech companies are in major demand across the globe. In 2019, an Australian company Airwallex raised 202 million USD from a global investor to expand its business.
A report by KPMG states that there are 629 Fintech companies in Australia, an 8% rise since September 2018. The same report also stated that the Fintech sector in Australia recorded $600 million across 28 deals in 2018. The two Fintech sectors with the highest growth were Insurance and the Middle & Back office.
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Growth in technology spending:
The tremendous growth in the Fintech sector is mainly due to the growth in technology spending in Australia. A study by Gartner indicates that spending on Information Technology products and services in Australia was estimated to hit nearly 93 billion AUD in 2019. This translates to a rise of 3.5% from 2018 and is also higher than the global average of 3.2%.
One trend that is emerging strongly in recent years is the interest of the enterprises to switch to cloud services instead of buying their own servers. These enterprises are slowly shifting to the ‘per for use’ model. This will lead to not only cost savings but also a rapid change in their digital business in terms of performance.
The study also states that nearly 28% of the spending by key enterprises in the IT markets globally by 2022 will be on the transition to the cloud server. Owing to this shift, the lifespan of all the devices purchased by these enterprises will increase. This means enterprises will be buying fewer PCs, laptops, and tablets owing to the lower replacement rates, a trend that will continue in the coming years.
The lending industry in Australia is currently progressing with great momentum and there don’t seem to be many obstacles to slow it down in the near future. This industry has been historically dominated by banks, but slowly the non-banking lenders are catching up to create a powerful and sophisticated lending industry in the country. One of the contributors to this growth is the hundreds of Fintech companies that are sprouting across the country. These Fintech companies are helping these financial institutions to improve the customer experience and at the same time helping in reducing the human errors owing to the humongous data that these institutions have to handle during the lending process. Also, these Fintech companies are being aided well by the Australian government that has allocated a significant portion of the budget to the growth in technology. Most of the funding is being utilized to migrate to cloud-based platforms which are further aiding these Fintech companies to reduce their spending on infrastructure.