Investors go for higher risk and higher returns

Growth in term deposits was strong last year, but banks lost market share to finance companies as investors chased higher returns.

A study by interest.co.nz found that New Zealanders held $76 billion in term deposits at the end of last month, up 8.7 per cent on the year before.

The bulk of that - $57.2 billion - was deposited in the big four banks, whose term deposits rose just 6.6 per cent over the year.

Finance companies, by contrast, had much stronger rises.

The cash in secured term deposits at non-bank financial institutions - mostly finance companies and some building societies- rose 17.7 per cent to $10.2 billion last year.

Cash in unsecured term deposits at the institutions rose 14.5 per cent to $4.2 billion.

David Chaston of interest.co.nz said the main reason for finance companies' gaining market share over banks was that they paid depositors between 75 and 300 basis points more.

Also, no finance companies in New Zealand had collapsed during the past four or five years, increasing confidence in them, he said.

However, the Reserve Bank and some financial commentators have warned of the risks in investing with finance companies if the economy slows and the property market drops.