Non-banks have shifted the focus of their activities to business lending this year, as their funding arrangements have made it hard for them to hold market share in the mortgage market. According to the latest Reserve Bank Financial Stability Review, non-bank housing credit contracted slightly in early 2023, while non-bank lending to business grew strongly. The RBA said the housing finance contraction reflected the broader mortgage market slowdown, exacerbated by rising funding costs for non-banks, which do not have access to low-cost deposit funding. At the same time, non-bank business credit growth has grown sharply, reaching an annual growth rate of 25 per cent in early 2023. “In recent years, banks have been pulling away from some forms of higher risk business lending, such as construction, property and vehicles, while non-banks have increased their market share in these sectors,” the RBA said. The relative riskiness of non-banks’ business lending is reflected in the interest rate charged by non-banks being 270 basis points higher on average than the rate charged by banks. The RBA’s findings support anecdotal evidence in non-bank lenders’ recent financial reports of a shift in business priorities. Pepper Money reported that it shifted the focus of its lending to non-conforming mortgages and asset finance during the second half of 2022, as it targeted higher yields to offset rising funding costs. Pepper’s prime originations were down 4 per cent, while near-prime originations were up 26 per cent. Asset finance originations rose 35 per cent. Resimac reported that mortgage settlements were down 32 per cent in the six months to December. At the same time, asset finance settlements grew 18 per cent. The RBA also looked at whether the non-bank sector presented any systemic risks for the Australian financial system. “Non-bank lending can be more concentrated, riskier and more pro-cyclical than bank lending. This can amplify credit and price cycles, particularly for property,” it said. “Non-banks have the potential to contribute to systemic risk because their business models tend to involve liquidity and maturity mismatches and the use of leverage, which can amplify risks.” Non-banks, relative to banks, lend more to borrowers who are self-employed, have impaired credit histories and are looking for loans with higher loan-to-valuation ratios. But the key issue for the RBA is that non-bank lending does not account for a large share of overall financing in Australia. Non-banks account for around 5 per cent of total lending for housing and the non-bank share of total business credit is around 8 per cent. The RBA said contraction in non-bank housing credit suggests that non-banks “have not unduly lowered their lending standards in an effort to maintain market share.” Arrears remain around historical lows.