Question

The potential implications that increase in non-bank lending growth have on the stability of the Australian financial system.

Answer 1

More dispersal of Loans means more availablilty of funds to businesses with immediate requirement but with a higher rate of Interest . Non-banking financial institutions unlike Banks charge a higher rate of Interest since lending is the main source of Income unlike a Bank which provides a lot of other services to their customers

As non-Banking institutions are not required to maintain the reserve ratio or adhere to other strict guidelines that banks have to follow it gives them a free hand to operate which could have both positive and Negative implications. Though they do have to meet the regulatory requirements

Those institutions that write fewer loans will have a high probability of NPA(Non Performing assest) in comparison to those

which are giving out a lot many loans as the percentage of defaulters will get small

Eg. If an institution is writes 10 loans and 1 gets default, the rate of NPA is 10%, however is 100 loans are given out and 5 are defaults, its still 5%.

Non bank lending is healthy as it contributes to the financial stability of the Economy. They are accessible to business which have riskier projects and banks don't like to participate. Non- banking institutions with big sums at their disposal and they can fulfill those requirements that the banks might not be able to

As they are quick, efficient and transparent it has a positive implication on Australian Financial Institution but to ensure the projects they are investing in are doing good/stay afloat the government should keep an eye on their activities like Auditing should be done regularly