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Instance Finance boss accuses retail banks of 'poaching' lenders by under-cutting high rates

Friday 2nd December 2016

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Instant Finance chief executive Richard de Lautour is accusing retail banks of poaching clients by undercutting loans the finance company has made at high interest rates once it has already done the hard yards on establishing borrowers' creditworthiness and ability to make repayments.

De Lautour claims that over the past four years the larger retail banks have moved more into high-risk personal lending, because of the low interest rate environment, adding to the increased competition already posed by the emergence of peer-to-peer lenders.

Instant Finance is in its 45th year of operation, offering mainly personal unsecured loans to the public nationwide at interest rates ranging from 19.95 percent to 29.95 percent. Its typical customer needs help paying bills, meeting the cost of a wedding or funeral, or travelling expenses in a family emergency and the bulk of its loans are to lower socio-economic people in south Auckland.

De Lautour said the banks have become their biggest competitors in the past few years.

“For anyone running a finance company this has become a real problem. The banks can access their knowledge of customers’ accounts to see who they’re paying and offer them loans at a very good margin,” he said. 

The “poaching” will only change if interest rates start rising again and people start defaulting on these riskier unsecured loans, which will frighten the banks off, he said.

A personal loan rates table on interest.co.nz shows Instant Finance’s rates are towards the higher end but not the most expensive of finance companies, while rates for unsecured loans by the major banks range from 12.65 percent to 18.95 percent and for peer-to-peer lenders from 7.9 percent from those with the best credit grades to 24.41 percent for those with the worst.

De Lautour defends his company’s high rates, saying it’s costly to run a network of branches around the country and determine loan risk, while at the same time admitting the privately-owned company is making “very healthy margins”.

Instant Finance’s 2016 financial accounts show it made a record profit of $8.4 million for the year to March 31 2016, up 18 percent on the previous year while gross loan receivables rose 3.8 percent on the previous year to $95.72 million. Its receivables ledger has since passed the $100 million mark after acquiring the business assets of Christchurch-based Fair City Finance this year.

Interest received on the loans was $26.4 million compared to $24.4 million the prior year while the accounts show total impaired assets of only $2.3 million, the same as the year before.

The company’s weighted average interest rate was 29.11 percent for the year while its average funding cost was 6.12 percent – meaning it made a net weighted average interest gap of 22.99 percent on the difference between what it borrows money and lends it out to people, up from 21.86 percent the prior year.

Instant Finance, which is majority-owned by the Nausbaum family, was forced this week to repay early 12 million redeemable preference shares due in mid-December that were issued in 2012. Under changes to the Financial Markets Conduct Act from this month it couldn’t retain them without having a trust deed and trustee in place, even though they were falling due in just a few weeks. In recent years it has switched its borrowing facilities to Westpac from Fortress Capital, which remains a 10 percent shareholder after negotiating the stake for free during the finance company collapses when public debenture funding for them dried up. 

The company hit the media headlines six years ago when some criticised its use of former rugby league superstar Stacey Jones as its advertising frontman, claiming it was trading on his profile to charge vulnerable people high interest rates.

De Lautour said Jones had been "very good for us" but no longer fronts the ads because sports star brands don’t have a long shelf life.

The Commerce Commission’s Consumer Issues Report 2016 said finance companies were the most complained about lenders despite comprising just 3 percent of the credit market. Instant Finance wasn’t on the list of the seven finance companies responsible for 40 percent of complaints.

Most consumer credit complaints were about non-compliance with disclosure obligations, with fees ranked second followed by potential non-compliance with responsible lending practices.

The commission is putting out new guidelines early next year on the approach lenders should take to charging fees after the Supreme Court this year dismissed Motor Trade Finance and Sportzone Motorcycles’ second and final appeal in a long-running credit fee case brought by the regulator.

The court upheld the commission’s view that under the Credit Contracts and Consumer Finance Act credit fees should only cover costs that are closely related to the particular loan transaction and not used to recover general business costs or to generate profits.

De Lautour said the finding will make no difference to his company’s approach to the way it set its fees but given growth in its loan book, it will reassess the fees set annually earlier than usual to ensure there has been no over-recovery.

 

 

 

BusinessDesk.co.nz



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