RBA says business lending is in Australia is in a ‘favourable’ position, supports private credit returns
Simon Arraj
Business credit growth in Australia has gained momentum and is well above its average since the global financial crisis, with the Reserve Bank of Australia (RBA) noting that funding conditions for business are favourable. This will support risk adjusted returns from private debt, according to Simon Arraj, Founder and Director of private credit investment manager Vado Private.
In its recent board meeting, the RBA noted that while business insolvencies had increased, including for medium-sized enterprises, they are still below their pre-pandemic trend. “Business credit growth had picked up and [is] well above its average since the global financial crisis. Funding conditions more generally for Australian financial and non-financial corporations remained favourable,” the Minutes of the Monetary Policy Meeting of the Reserve Bank Board reveal[1].
According to Mr Arraj, this is very positive commentary from the central bank. “This robust growth in business credit signifies a healthy and expanding economy, as businesses seek funding to fuel their operations and capitalise on growth opportunities,” he said.
“Demand for business credit remains strong, reflecting a robust business environment. This demand is driven by factors such as capex, equipment purchases, increased investment in technology and expansion of businesses into new markets. It is this activity that is supporting returns on investments in private debt funds,” he said.
Data from the RBA reveals business credit growth is easily outstripping growth in housing credit. Seasonally adjusted growth housing credit grew just 4.7% in June this year from a year earlier, while personal credit, which includes credit card lending, grew by just 2.8%. In contrast, business credit (lending to non-financial businesses) grew strongly, by 7.8% over the year.
“Despite higher interest rates, credit quality generally across the Australian economy remains high with non-bank lenders performing an important role by funding business operations and growth,” Mr Arraj said.
This is validated by stress testing of non-bank lending in Australia conducted by the RBA. The RBA’s analysis, published in April 2024[2], found that the overall risks to financial stability posed by the non-bank financial institutions (NBFI) sector in Australia “remains contained”. The central bank concluded that the size of riskier NBFI activities in the Australian financial system remains modest.
The robustness of business lending in Australia supports returns on private lending. With interest rates on private debt typically floating rate, investor returns have increased with official RBA rate rises, according to Mr Arraj.
“Private credit investments can deliver investors yields of around 10% per annum, which is more very attractive compared to yields on cash investments of less than 5% and investment grade corporate bonds, as measured by the S&P Australia Investment Grade Corporate Bond Index[3], which returned 6.8% over the year to 31 July 2024,” he said.
The RBA in its recent meeting minutes also noted that conditions in residential construction remained challenging. New dwelling supply had weakened, and ongoing cost pressures and labour shortages were constraining residential dwelling construction. While there was still strong growth in underlying demand for housing, this had diminished slightly as the average household size had increased, possibly in response to higher rents and housing prices, the RBA noted.
“The demand for well-designed and constructed projects in desirable locations remains strong. Despite feasibilities being tested, we are starting see more normalised conditions with respect to construction costs. This dynamic combined with the demand and supply mismatch is elevating demand from property developers. This is great for private credit investors who are generating double-digit returns when financing these types of loans,” said Mr Arraj.
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