Business lending conditions in favourable position, says investment manager
Recent commentary from the RBA suggests that business credit growth is gaining momentum as businesses look to invest in technology and expand into new markets.
The latest minutes from the RBA indicate that business credit growth has gained momentum and is well above its average since the global financial crisis, according to Simon Arraj, Founder and Director of private credit investment manager Vado Private.
In its meeting minutes, the RBA noted that business credit growth had picked up and was well above its average since the global financial crisis.
“Funding conditions more generally for Australian financial and non-financial corporations remained favourable,” it stated.
Arraj said this robust growth in business credit signifies a healthy and expanding economy, as businesses seek funding to fuel their operations and capitalise on growth opportunities,” he said.
“Demand for business credit remains strong, reflecting a healthy business environment.
“This demand is driven by factors such as capex, equipment purchases, increased investment in technology and expansion of businesses into new markets.”
Though the RBA noted an increase in business credit growth, this is predominantly for medium to large businesses with lending conditions for small businesses remaining stagnate.
“Bank lending to small businesses had not increased for some years,” the RBA said.
Data from the RBA reveals business credit growth is easily outstripping growth in house credit, Arraj noted.
Business credit has grown by 7.8 per cent over the last year, whereas housing credit only grew by 4.7 per cent and personal credit by 2.8 per cent.
“Despite higher interest rates, credit quality generally across the Australian economy remains high with non-bank lenders performing an important role by funding business operations and growth,” Arraj said.
The RBA conducted “stress testing” of non-bank lending in Australia which found the overall risks to financial stability posed by the non-bank financial institutions sector remains “contained”.
The RBA also said the size of riskier non-bank financial institutions in the financial system remains modest.
Arraj said due to interest rates on private debt typically being a floating rate, investor returns have increased.
Private credit investors are also being benefitted by the demand for well-designed and constructed projects being strong, he said.
Though demand for construction is strong, the overall conditions remain challenging, according to the RBA.
“Despite feasibilities being tested, we are starting to see more normalised conditions with respect to construction costs,” Arraj said.
“This dynamic, combined with the demand and supply mismatch, is elevating demand from property developers which is great for private credit investors who are generating double-digit returns when financing these types of loans.”
