Fringe lending pilot brings transparency in tough times

Monday, 2 March 2009

With predictions of a deepening economic crisis, a small loans pilot initiated by National Australia Bank (NAB) is well-timed to expose the true costs in the fringe lending market.

The NAB Small Loans Pilot, launched in May 2008 with alternative credit provider Money Fast, was developed in response to a need for lower cost loan options.

Under the pilot, NAB is providing Money Fast up to $1 million in loan capital to fund small personal loans of between $1000 and $5000 for a 12 month term, at an interest rate of 15.95% p.a. for every dollar borrowed.

NAB’s Head of Community Finance & Development, Richard Peters, said that six months into the pilot, plans to test a breakeven interest rate (where revenues fully cover costs) were tracking well.

“Data indications are that the actual breakeven rate of 27.92% (or 15.76% as a percentage of the initial loan amount) is slightly less than forecast and remains well below current industry practice,” Mr Peters said.

“What this demonstrates is that fringe lenders who are charging annual interest rates as high as several hundred percent are preying on consumers who have limited options.

“The pilot has also shown profit margins to be slightly above expectations, up from the first to second quarter from 1.79% to 2.10%.”

NAB is committed to increasing transparency in the rapidly-growing fringe market.

The pilot is not a commercial venture for NAB, but an extension of NAB’s microfinance programs that aim to address financial exclusion by creating fair and affordable loan options.

Money Fast Chief Executive Officer, Justin Hatfield, said the pilot sought to demystify a sector where many players exploited loopholes to charge vulnerable consumers with high rates and charges.

“Fringe lending is an area that takes advantage of people facing difficult times. Recent indicators are that more people are entering this market as a result of a downturn in financial circumstances due to employment status and income levels,” Mr Hatfield said.

“Under the pilot, we saw a reduction in small loan applications prior to Christmas due to the Australian Government’s stimulus package, although this was followed by a spike in January applications. A similar pattern is expected as a result of the Government’s latest stimulus package.

“Expectations are that tough economic times will force people who have not previously accessed fringe lenders to go down this path. They are not necessarily high-risk borrowers, but find themselves in difficult circumstances.”

The small loans pilot is operating with the oversight of an independent advisory group, comprising representatives from leading consumer, academic and community groups.

As the only big bank to be actively participating in Australia’s alternative finance market, NAB has taken a unique leadership role in this market.

NAB also supports measures by the Rudd Government to regulate fringe lenders as part of a proposed overhaul of consumer credit laws to be phased in from mid-2009.

“Combined with the counsel provided by the advisory group, the pilot will make a significant contribution in stimulating much-needed debate and reducing barriers to change,” Mr Peters said.

“Fringe market players have long sought to ‘fly under the radar’, but our pilot is seeking to put the spotlight on the true cost of fringe lending.

“The overall winners from both the pilot and the government legislative changes will be low income and vulnerable consumers.”

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Fact Sheet and media interviews are available upon request.

For further information, please contact:

Richard Peters National Australia Bank T: (02) 9237 9827 M: 0438 582 919 Angela Jackson Cox Inall Communications T: (02) 8204 3876 M: 0407 213 522

* The information contained in this media release is for media advice purposes only. The contents are true and correct at time of publishing/issuing, however may change over time. For further information about NAB products or rates, please go to Interest Rates, Fees & Charges