Finance firms trim banks' lead in business loans

December 24, 1992|By American Banker

NEW YORK -- Finance companies' share of the commercial lending market grew at the expense of banks last year, according to American Banker's annual survey of the industry.

Finance companies increased business loans by 5.8 percent, to $309.7 billion. By contrast, business loans at commercial banks fell 4.7 percent.

Moreover, finance companies' share of business loans increased 33.3 percent, their highest percentage ever. In 1990, their portion was 31 percent.

The full-year 1991 figures just became available. And observers believe that finance companies continued to increase their market share this year.

Finance companies, unlike banks, had a wealth of capital to draw on in 1991. This enabled them to increase business lending banks retrenched.

Because lending is finance companies' main source of income -- they lack the option of offering the diverse services that banks do -- they continued to solicit loans aggressively during the recession.

In addition, finance companies traditionally lend to riskier borrowers who would be likely to be rejected by banks during an economic downturn.

Over the past decade, finance companies have muscled into just about every area of bank lending, including mortgages, credit cards, real estate and commercial loans. And they have generally been more successful than banks.

William Bowen, of the First Manhattan Consulting Group, believes that finance companies are better able to assess risk than commercial banks are. For example, he said, in deciding whether to make a loan, bankers consider a potential borrower's deposit business. Finance companies do not.

"This is our only business," said Thomas P. Shippee, senior vice president and division manager at Norwest Financial Services TC Inc., the second-biggest bank-owned finance company, after BankAmerica Financial Services System.

"We don't have managers looking for fee income or checking accounts," he said. "We are focused on making loans. If we aren't making loans, that's all we talk about."

When finance companies lend money to fund new inventory or accounts receivable, for example, they monitor the borrower's business carefully, down to checking what goods are shipped. Most banks, Mr. Bowen said, do not watch their borrowers so closely.

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