No-frills small business loans gaining popularity

Arrears on so-called "low-doc" loans are rising but the Reserve Bank says the latest fashion in lending is not yet ringing alarm bells in terms of the stability of the banking system.

In fact, New Zealand banks are showing interest in following in the footsteps of their counterparts in Australia, where the rush to the higher-risk, low-documentation market has attracted the interest of policymakers and regulators.

Low doc loans, which carry a higher interest rate than standard loans, are widely marketed as catering for the self-employed or those who do not meet traditional lending criteria because they do not require income verification and other documentation.

In Australia, Bluestone Mortgages head Alistair Jeffery has warned the rapid growth of the low-doc mortgage market was a "bus crash waiting to happen".

Some critics have suggested the loans also appeal to people who do not want an official record of income they are not declaring to taxation officials.

In New Zealand arrears on low doc loans are on the rise even though arrears on prime loans are improving, according an Australian website featuring news from the banking sector, The Sheet.

It reported this weekend that data compiled by Standard & Poors on arrears on loans funded through mortgage-backed securities showed arrears of 30 days or more on low doc loans increased to 6.13 per cent in April 2006, up from 5.66 per cent in March 2006 and compared with 4.0 per cent one year ago.

The ratings agency said arrears on "full doc" loans -- normal transactions in which borrowers disclose to the bank their income levels and sources -- dropped to 2.55 per cent in April 2006 down from 2.62 per cent in March 2006 and compared with 1.95 per cent a year ago.

In Wellington, the Reserve Bank has noted "an uptick in problem loans" in its financial stability reports, despite indications that further increases in "impaired assets" from loans already on the books of banks should be moderate.

"However, the recent introduction of new higher-risk lending products, for example, 'low doc' and '100 per cent' loans (without a borrower deposit), could result in increased loan losses going forward," the RBNZ said.

"Indications are that banks are making these products available quite selectively, and at an interest margin for the additional risk built into the lending rate," the central banker said. "There is a chance that a continued drive by banks for market share, as credit growth slows, will result in erosion of these risk "mitigants".

At Westpac NZ, Piers Scott said low doc loans were typically for self-employed or migrant customers that "for one reason or another do not have ready access to proof-of-income documentation".

Westpac NZ catered for these customers on a case-by-case basis through a specialist assessment team, he said.

"We don't currently have a formal product for this, however we are in the process of reassessing our position on this as we acknowledge that it is becoming a stronger customer need in the NZ market".

Mr Scott said that proportion of the bank's NZ loan book made up of such loans was negligible.

- NZPA