The entire article can be found at 

http://www.kpmg.com/global/en/issuesandinsights/articlespublications/frontiers-in-finance/pages/non-bank-credit.aspx

By:  Richard Hinton, KPMG in the UK

The rise of non-bank credit: Revolution or evolution?

Traditional bank lending continues to be constrained by tighter regulation, increased capital requirements and a more conservative approach to risk. This would appear to open up significant business opportunities for alternative sources of credit, but there are a number of factors that may hinder the much-heralded revolution in credit provision. Richard Hinton outlines some critical success factors for aspiring new entrants to the evolving world of primary lending.

The global scale of bank lending is so large that if banks retrench their activities by even a few percentage points, it will open up a significant market for non-bank lenders. But if there are any concerns about a potential explosion in non-bank lending leading to another credit bubble, these should be balanced against the countervailing constraints: the market is globally fragmented, the barriers to entry can be high and it is hard to identify and implement the right business model for the right market. For example, the differences between Europe, North America and Asia are stark.

North America

In North America, by contrast, there is a mature non-bank lending sector – from community banks to micro-lenders to accounts receivable financing to peer-to-peer or social lending – and it would appear this increased diversity is one of the reasons why the supply of credit is not such an issue in the US as it is in Europe. The diversity also increases the capacity of the credit market to fill any gaps that emerge as the banks come under pressure. There is less of a sense of stress; simply a natural progression as market mechanisms react to changed circumstances. However, it also means the US market is very competitive, with returns being squeezed, so funds are being forced to look beyond their home market. We see this reflected, for example, in a focus from US investors on markets such as Spain and Ireland, where they have recently transacted for the first time.

Evolution, not revolution?

We are entering an era of opportunity for alternative credit. Just as in the past we have seen the leasing industry flourish as firms looked for more flexibility in their use of capital and a securitization boom as banks seized the opportunity to free up their balance sheets, now there is an opening for non-bank lending to achieve a step change. But success for a new entrant is not a given. It will only come from detailed analysis of particular opportunities in the context of a clear understanding of their own business model – and how flexibly it can be shaped to meet the local needs of markets, regulators and customers. In the end, what we may be witnessing is not so much a revolution as an evolution.