Non-bank lenders are looking to ease lending standards in a bid to compete with the majors in the current tough economic environment.
After cracking down on lending standards in recent times, the Australian Prudential Regulation Authority has left Australian banks in a good position to deal with the current higher risk of bad debts as borrowers come off fixed rates and face higher mortgage repayments.
The Reserve Bank says despite the non-bank sector growing significantly since 2015, they do not pose a wider risk to the economy and still only hold less than 5 per cent of the home loans in Australia.
In a bid to remain competitive, the RBA said some smaller lenders were cutting loan standards and making a play to get higher risk borrowers on their books.
“In an effort to rebuild margins and lending volumes, liaison discussions indicate that some non-bank lenders are relaxing serviceability requirements and targeting higher risk borrower segments, such as those with less documentation about their finances,” the RBA said.
“At the same time, some non-banks have found it difficult to retain credit-worthy borrowers who have sought to refinance their loans on highly competitive terms with banks.
“A weakening in lending standards and overall loan quality could lead to more risk concentrating in a part of the financial system where regulators have less oversight.”
Regulators will be increasingly keeping a close eye on the non-banks, who are not subject to the same strict regulations as the majors.
Last week the RBA released its latest analysis looking at borrowers who had or are approaching their fixed rate mortgage cliff.
The statistics showed that around half the borrowers who took out low-interest home loans during the pandemic were already on higher rates now and the other half look set to be able to accommodate higher repayments as they come off their fixed rates as well.
“Fixed-rate loans yet to roll off do not appear materially riskier than those that have rolled off already,” the RBA said.
APRA chairman John Lonsdale however said a spike in mortgage arrears at non-bank lenders had raised eyebrows and promised a broad-based review of the financial sector.
“We are looking at the risk and APRA does have some tools at its disposal if it feels there are broader systemic risks,” he told Australian Financial Review.
“When we sit around the table at the Council of Financial Regulators every quarter, it is a risk we look at.
“You are seeing more stress than what you are certainly at the major banks.”