Finance company rules have downside, says business lender

Tougher regulations and high deposit rates offered by Government guaranteed finance companies will drive out small finance companies and could make it more expensive for borrowers, a local business lender has warned.

Terry Haydon, director of Auckland firm Commercial Factors and Finance, which lends money to companies to help them manage cashflow but does not borrow from the public, said the Government's extended deposit guarantee scheme was distorting the market by allowing guaranteed finance companies to offer higher interest rates at a low risk.

South Canterbury Finance, one of only four companies so far accepted in to the extended guarantee, has set a rate of 8 per cent for its debentures which mature at the end of next year.

Haydon said small players would have to offer more than 2 per cent above that rate to compete for investors' cash putting a squeeze on their margins.

New players would also find it much harder to enter the market under the extended scheme.

"The cost of entry into the capital market is now reserved for major players at the expense of small players that specialise in certain areas."

Haydon put the cost of meeting new regulations at $250,000 a year and said even the credit rating exemption, which companies with liabilities of under $20 million can apply for, would save only about $20,000 of that.

"Many small finance companies will be forced to close up shop, although they have run good businesses," he said.

Haydon also worried about banks having to compete with Government guaranteed finance companies to raise the capital they need to meet new core ratio requirements.

New regulations mean banks have to raise 75 per cent of their core ratio capital from the local market. It is designed to provide more insulation from world shocks like the credit crisis, which stopped banks from being able to raise cash internationally at its peak in October 2008.

Haydon said if banks had to pay more interest to compete with guaranteed finance companies for deposits, borrowers could end up paying more.

"New Zealand capital markets will continue to be screwed up until after 2011 just to save a chosen few at a cost to competent operators, taxpayers, the borrowing public and maybe even the economy at large."

Haydon said he believed poor performing finance companies should have been allowed to fail rather than being guaranteed by the Government - a move which has already cost the taxpayer millions of dollars.

He wants more emphasis on cashflow, with any company raising money from the public having to make its accounts publicly available.