Medium-sized firms being hit by tighter credit - Reserve Bank

Small and large firms are finding it easier to raise finance for expansion - but mid-range business are struggling.

The Reserve Bank's latest financial stability report says banks have relaxed lending standards since the worst of the financial crisis, and larger corporates are, in any case, bypassing them and going straight to the market with bonds.

Small firms typically raise finance using either the business as collateral or - more often - the owners' home.

Firms with 100 or more employees are usually able to raise credit without as much collateral, mostly because they have a proven cashflow, the report says.

"Anecdotal evidence suggests that the 'gap' in the middle may have become larger, with some firms that don't have property collateral or a proven history having continuing difficulties obtaining sufficient bank funding since the financial crisis." 

In the past, this middle group has borrowed from other sources to fund investment and expansion of business. Most of this from the non-bank financial sector, comprising credit unions, building societies and finance companies.

Few finance companies survived the firestorm of 2006-09, and those that are still around are shellshocked and careful with their lending, as is the non-bank financial sector as a whole.

At the peak of the boom, the non-bank sector accounted for 8% of total lending and held assets of about $25 billion.

Today the lending is 3% of total credit outstanding, assets are worth about $12 billion, and lending from the sector "continues to contract", the report says.

Banks, meanwhile, are more cautious with their lending, but not overly so, the Reserve Bank says.

"Credit conditions in some segments had clearly become loose before the global fiancial crisis.

"It is also natural that banks are more willing to lend when they have collateral as well as confidence in the business they are lending to.

"In some cases, most clearly in property development, firms are likely to need large tranches of equity and more diverse sources of finance than before the financial crisis."

Businesses are borrowing again for expansion, but only modestly, the report says.

Overall, the New Zealand financial sector is more stable than at the time of the last report six moths ago, but it remains vulnerable - just a bit less so, it says.