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Private credit has seen a significant boom, according to new research, with brokers revealing why they use private lenders.
Research from the Reserve Bank of Australia (RBA) has found that non-bank financial institution (NBFI) activity has grown by just over 40 per cent globally since July 2019, outpacing bank credit growth that has increased by approximately 25 per cent in the same period.
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The research found that NBFI activity has been growing at approximately 16 per cent year on year, with the market size between $150 billion and $200 billion in Australia.
A growing proportion of this is coming from private lenders, according to financial services provider Citi Group.
Citi analyst Brendan Sproules said that the boom in private credit has occurred due to regulatory and capital restrictions that banks are subject to.
In 2016, the Australian Prudential Regulation Authority (APRA) conducted an in-depth review of development and investment lending, from which APRA identified “inadequate controls and weakening underwriting standards” at the banks.
Following APRA’s notification to the banks that it had noticed subpar controls in commercial real estate (CRE) lending, there was a reduction in high loan-to-value ratio (LVR) lending, with the average LVR on a CRE loan down to approximately 65 per cent at the major banks.
“While we don’t have strong data on private credit growth in Australia, anecdotally [private lenders] have filled this gap of slowing bank lending as borrowers have looked for mezzanine solutions between an LVR of 60–90 per cent,” the analyst said.
Sproules said that the rise of private lending in Australia is indicative of a “structural shift” that is emerging in the nation’s financial system.
Why brokers have made the move to private lending
With private lenders becoming increasingly popular for clients with complex credit backgrounds, brokers have taken advantage of the flexibility of private lending policies to support the diverse needs of their clients.
Speaking with The Adviser, John Alvarez, managing director of Finselect Group, said that private lending is a “critical and growing part of our available solutions” when it comes to sourcing finance for self-employed clients and businesses.
“The products have become more flexible and affordable over the course of the last three years,” Alvarez said.
“As credit policies have tightened in the banking sector, we’ve looked to non-bank lending as a stepping stone to solve short-term problems/challenges businesses face.”
The managing director said that he commonly uses private lenders to raise capital for acquisitions, bridge funding shortfalls, working capital, and fund construction and development.
Dion Fernandes, a finance specialist with Emerge Finance, said that he has turned to private lenders for clients who require “swift approval and minimal bureaucratic hurdles”.
Fernandes said on the benefits of using private lenders: “I feel brokers should recognise that private lending offers strategic advantages, such as speed and flexibility, which traditional lenders might lack.
“Rates might be higher, but they are often justified by the convenience and the ability to secure loans for clients who otherwise would be declined.”
Similarly, Citi’s Sproules said that private lenders were a sector for the banks to look out for “as a competitive threat in pockets of commercial lending”.
The analyst said: “Certainly, we have seen through history huge swings in the availability of non-bank liquidity, which typically occurs late in the cycle as other liquidity tightens and some want to keep the music pumping.
“Despite the current exuberance, we think there are clear underlying drivers which explain the structural emergence of private credit both in Australia and offshore.”
Find out more about private lending by checking out The Adviser’s Guide to Private Lending.
[Related: The broker’s guide to private lending]
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