The trend is likely to continue into 2013 as unsecured lending sits on the banks' agenda, making the non-bank lending space more attractive for commercial consumers. High-nett-worth individuals and investor companies are increasingly finding it difficult to obtain finance quickly enough from the commercial banks due to their slower turnarounds and restrictions on secured lending.
At times commercial consumers need a quick short-term finance injection, but the amount of paperwork and transactional requirements it takes the bank to structure the finance for asset-backed lending often takes too long. The banks processing times can currently take anything from two to three months and their turnaround times are increasing due to new Basel requirements.
Paul Greeff, head of the Banking Sector for Global Credit Ratings (GCR), says that as a consequence of the impending adoption of regulations under Basel III, higher liquid asset holdings will place interest margins under pressure and increase unsecured loan volumes.
"Through a combination of the bursting of the property bubble in South Africa, the introduction of the National Credit Act and slowing economic growth, banks have tightened lending criteria, requiring sizeable deposits on secured loans. It is these amounts that are now being financed through unsecured loans, fuelling the shift from secured to unsecured lending," Greeff said.
The profit margin for the banks to lend to secured asset-based clients isn't attractive, leaving high-nett-worth clients in a fix when liquidity is needed. Because of the banks' tougher lending criteria and protracted processing times, it makes sense for a high-nett-worth individual to make use of a second-tier lender to obtain short-term liquidity for commercial purposes, while he waits for the bank to finalise his application further down the line.
As a result, we've seen a noticeable trend in enquiries from clients with strong balance sheets and a lot of assets, many with un-bonded assets, and because the banks turnaround times are increasing there is a greater propensity for individuals to use an alternative resource, even though the premium on using a non-bank lender is higher.
These clients realise that it would be more costly for them to not have access to finance. Although they might be sensitive to the premium, these clients recognise that access to liquidity in a short space of time far outweighs the premium and potential financial and commercial losses that can result when finance is not readily available, particularly when development and building projects are hanging in the balance.
These clients are not desperate for cash or "on their last legs". We're dealing with high-nett-worth clients who own assets and are generally in a strong financial position. However, there may be times when they need access to a large amount of money and require finance for working capital, but their wealth is wrapped up in other investment vehicles, assets or in accounts where they can't access it immediately and they just can't get it quickly enough from the bank.
Because second-tier lenders are not regulated like the banks, they are able to authorise and process finance solutions specific to their needs. Second-tier asset-based lenders are increasingly playing an important role in the lending space because consumers are provided with fast-tracked short-term liquidity and a bank guarantee within 24 hours, allowing them to continue with business as usual and get their commercial interests underway.
