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Profits for the non-banking finance sector have fallen sharply over the past year as the higher cost of funding, rising overheads, falling margins, and increased provisions for bad debts weighed on their performance.
Business consultancy KPMG's annual survey of 28 finance companies, building societies and credit unions showed combined profits fell 27 percent to $298.2 million, after surging 38 percent the previous year.
Total sector assets rose about 8 percent to $22 billion as lending increased, but the pace of growth slowed and margins eased back 18 basis points to 6.68 percent.
KPMG banking head John Kensington said the sector served more than 1.7 million people, which the main retail banks either ignored or serviced poorly.
"It has been a tough year for the non-bank sector, but those we spoke to are confident that there remains a real need for their services and products, and the results show this."
The survey included specialist business lenders such as car and machinery finance, as well as building societies and credit unions owned by their members.
Kensington said the sector had felt the pressures of the slowing economy, rising interest rates, inflation, and regulation, but would need to adapt.
"The sector will need to ensure they are adjusting their businesses as needed, in order to continue to navigate and operate in the year ahead, where uncertainty looks to be the only certainty."
A sign of things to come
The softer economy was highlighted by a more than doubling of the amount set aside for bad and doubtful debts, which rose to $279.6m from $121.9m the year before, and an increase in operating expenses compared to income. Four of the 28 firms surveyed made a loss in the past year.
Kensington said the tougher market experienced by the small finance players was perhaps the sign of things to come for major retail banks, which were starting to report similar financial pressures in the second half of this year.
"They might be a bit of a bellwether or forecaster ... these entities have seen this impact across the board with some of them forced into a loss, while the banks are seeing the same sorts of things but with a lesser impact on their results."
Kensington said the small finance sector was hampered by having to pay more for funds, and once again the survey showed indifference and misconceptions of regulators and investors.
"When speaking with the sector, [we] heard the importance of addressing the misconceptions, particularly with the regulators and some prospective customers."
He said this was apparent in the way credit assessment laws, and new rules for tougher capital and reserve requirements had been designed treating major banks and small finance firms or credit unions with a one-size-fits-all approach.