With inflation and interest rates expected to remain high for longer and delinquencies increasing, the NBL sector is under sustained pressure. APRA chairman John Lonsdale recently expressed specific concerns about the upward trajectory of NBL’s loan delinquencies, which have caught the watchdog’s eye. As a leading player in the NBL sector, NOW Finance has felt these pressures. It has also successfully navigated this complex macro environment to date. We spoke to Richard Blumberg, NOW Finance’s CEO and Founder about the state of the NBL sector and what may happen next.

How adversely has the NBL sector been impacted by margin compression caused by significantly higher funding costs and higher delinquencies?

Whether you’re a traditional bank or an NBL, the significant rise in rates and volatility in funding markets globally has led to a significant increase in funding costs. As a result, we’re seeing margin compression across the industry, coupled with increasing delinquency. However, it’s important to remember that unlike banks, NBLs don’t have the luxury of a deposit book or the option of taking customer deposits which has magnified the impact. There are outliers, where delinquencies may have risen more than the pre-covid period, however more adept operators have seen delinquency levels return to those pre-covid levels. That, in addition to higher operating costs – the result of inflation – have meant that bottom lines are being squeezed across the board.

 What does this mean for the NBL sector – both in terms of its competitiveness and its relevance to customers and capital markets?

For the non-bank lending sector to remain relevant it needs to grow; and to grow it needs access to equity capital. Right now, that’s the part that is frustrating and difficult for the NBL sector. Institutions are being extremely cautious and concerned about how much more pain is to come, and therefore, very conservative in how they are assessing value and their willingness to invest. If businesses do manage to access equity capital, it’s extremely expensive. As a result, it makes growth in the NBL sector difficult and it’s a major roadblock that exists in the sector currently.

So, what can be done to address the issue?

There needs to be appetite at an institutional level to participate in equity in the NBL sector. If you look at the list of those in the Non-Bank Lending sector, all companies are trading or being valued at enormous discounts and there is little or no demand on the part of institutions. As this coming year plays out and institutions become more comfortable that certain NBLs have adequately navigated through this difficult period, we hope to see demand return as the longer the sector remains undercapitalised, it’s ultimately consumers who lose out due to the reduced competition and return to dominance of the big 4 banks.