The reality of non-bank lenders during a crisis and how data can help

Wiserfunding CEO Gabriele Sabato explores the recent shifts in lending behaviour during downturns and how they can navigate the market with data-driven solutions.

Non-bank lenders, often regarded as the more dynamic, impulsive counterparts when compared to conventional financial institutions, have witnessed a notable upswing in demand in recent years. Their more lenient lending criteria and propensity to engage in higher-risk lending have gained escalating favour among small businesses. So, is the significant increase in interest rates benefiting them? It would be right to assume that in a higher interest rate environment, non-bank lenders would be able to charge more for their lending and improve their risk-reward trade-off. However, differently from banks, they cannot leverage customer deposits to fund their lending and the cost of their capital has also been increasing in line with the market. This has started to squeeze their margins, rather than improving it. In addition, their access to funds became more difficult due to the lower level of liquidity in the market. In this blog, we’ll explore the reasons behind the current success and struggle of non-bank lenders and the opportunities still out there. 

Non-bank lenders have been flourishing since the 2008 financial crash. When banks had to drastically reduce their corporate lending in response to the crisis, non-bank lenders stepped into the breach, providing small businesses the liquidity they needed. Today, non-bank assets comprise nearly half of all global financial assets, representing 49% of the total in 2021, amounting to $239 trillion. This marks a substantial increase of 42% since 2008.  

The tide, however, may be changing soon.  

A recent report written by Alsadoro et al. (BIS working paper n1074) finds that non-bank lenders cut lending about 50% more than banks during a downturn.  The authors point at two key factors: 

Firstly, non-bank lenders tend to lend to riskier borrowers who are expected to face more challenges during crises. This means that in challenging financial times, non-bank lenders will likely scale back their lending more than banks.  

Secondly, according to the report, which we have summarised here, the borrower derives greater benefit from the lending relationship, more typical of banks. But why is this?  

  • Banks are seen as possessing superior knowledge about the quality of borrowers. They can also internalise losses through the implementation of a “bail-in” tool, which reduces the debt owed by a bank in times of financial instability, preventing taxpayers from having to cover these liabilities. Non-bank lenders can’t offer this function. 
  • Borrowers are also more likely to be drawn to banks in times of economic insecurity due to their ability to share sensitive information or monitor collateral more effectively, reducing information costs.  
  • Banks have an enhanced ability to collect borrower information* and secure non-lending business with the borrower, including providing debt advice or underwriting services, something non-banks struggle to provide. 
  • Relationships with banks can also lead to better loan terms, especially when borrower transparency is low, which may be the case for risky borrowers during crises. 

So, are relationships still that important in a digital world? The answer depends on the ability of non-bank lenders to access and process available data. By leveraging valuable insights from data, non-bank lenders can gain a better understanding of the market. They can also evaluate and improve their internal efficiencies and processes. This introspective period allows them to equip themselves with the best possible tools and strategies to capitalise on the market's recovery. 

This is where smart solutions come into play. By partnering with a credit risk expert that offers a dynamic portfolio solution, non-bank lenders can harness the power of AI-driven technology in providing a comprehensive understanding of the macroeconomic situation while offering deep insights into their individual portfolios.  

Capable of processing vast quantities of structured and unstructured data, intelligent solutions allow non-bank lenders to identify patterns and respond to changing circumstances, providing access to: 

  • Market trends: Non-bank lenders can identify market trends through the analysis of real-time data, helping them stay informed about evolving market conditions. 
  • Customised alerts: Some smart solutions allow non-bank lenders to set personalised alerts for issues that are most relevant to their portfolio, ensuring they stay updated on critical developments. 
  • Stress testing: Non-bank lenders can subject their portfolio to stress tests, evaluating their resilience and performance under different scenarios. This helps them assess the potential impact of adverse events and make proactive adjustments. 
  • What-if scenarios: Some solutions enable lenders to simulate "what if" scenarios, allowing them to evaluate the potential outcomes of different market conditions and adjust their strategies accordingly. 
  • Real-time analyses: Non-bank lenders receive real-time analyses and updates based on up-to-date data, empowering them with accurate and timely information for decision-making. 

While non-bank lenders may currently be facing challenges due to high inflation, this period can serve as an opportunity for them to strengthen their position. By leveraging an advanced portfolio solution to streamline, simplify, and consolidate processes, non-bank lenders can maintain a proactive approach to the current and future health of their portfolio, positioning themselves for a successful comeback when the market bounces back. 

To learn more about Wiserfunding’s portfolio solution, click here. 


* BIS report, Non-bank lending during crises (published 2023) 

* The Journal of Finance, Insiders and outsiders: The choice between informed and arm’s length debt, Rajan, R.G. (published 1992) 

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