Non Bank Finance is a service offered by the Non Bank Financial Institution (NBFI). NBFI’s do not have the license for full banking activities and come under the supervision of national or international regulatory agencies. They facilitate financial services that are related to banking like investment, contractual saving, risk pooling and market brokering. The insurance companies, cashiers check issuers, pawn shops, check cashing locations and currency exchanges and fall under this category. The non bank finance institutions like insurance companies, mortgage providers and pension funds play a critically important role in mobilizing and offering market based safety nets. The markets provide ample opportunities for long term savings and household investment while buffering the low income groups against the risk of sickness, catastrophic events or loss of the breadwinner or such other devastating events.
Non bank finance is mainly aimed at building friendly societies and credit unions. These institutions came under uniform legislation from 1 July 1992. Since July 2000 these institutions have been governed by the provisions of the Banking Act and the Corporations Act and are now supervised by the Australian Securities and Investments Commission (ASIC) and also the Australian Prudential Regulations Authority (ARPA). The members won and control the Credit unions and the building societies. The concept of one person one vote is enshrined in the legislation. Members of these non banking finance institutions are similar to people dealing with banks as they can avail cheque facilities such as agency cheques and payment orders along with deposits and loans. They also have other non bank financing services like insurance.
As a consequence of the global financial market crisis that hit the smaller players hard, the non bank lending share of the mortgage market has crashed and reached a record low. Since the non bank finance providers may be forced out of the market, the big four banks with no competition may not reduce interest rates to the desired level or to match the interest rate cuts announced by the Reserve Bank of Australia (RBA). If the global credit markets continue to remain frozen, it is feared that the non bank finance institutions will be out of mortgage business and the situation will be highly beneficial to the big banks.
It is clear from the extensive analysis of Australia’s mortgage market has driven the non bank lenders to the point of no access to funding due to the global financial crunch. Adding to that, the Federal Government has extended guarantee on the banks’ wholesale funding along with the advantage of the AAA rating on debt. A survey by Deloitte reveals that almost 1500 people who are home owners have already started to switch to the big four banks. The younger borrowers are expected to prefer the safety of the AAA rated banks of Australia. The Deloitte report suggests that non bank mortgage lenders would be squeezed out of the mortgage business in12 to18 months. They could survive till then using the funds they generated on existing loans. After that if the credit markets do not improve, they would be compelled to redesign their business for survival.
The absence of
non bank finance would be bad news for the Australian consumer as the big banks would take control of the market.