By Layne, Richard
American Banker , Vol. 157, No. 245
Finance companies' share of the commercial lending market grew at banks' expense last year, according to American Banker's annual survey of the industry.
Finance companies increased business loans by 5.8%, to $309.7 billion. In contrast, business loans at commercial banks fell 4.7%.
A Third of the Market
Moreover, finance companies' share of business loans increased to 33.3%, their highest percentage ever. In 1990, their portion was 31%.
The full-year 1991 data just became available. And observers believe that finance companies continued to increase their market share this year.
Finance companies, unlike banks, had a wealth of capital to draw on in 1991. This enabled them to increase business lending while banks retrenched.
Since lending is finance companies' main source of income - they don't have the option of offering the diverse services of banks - they continued to aggressively solicit loans during the recession.
In addition, finance companies traditionally lend to riskier borrowers who would be even more likely to be rejected by banks during an economic downturn.
Over the past decade, finance companies have steadily muscled into just about every area of bank lending, including mortgages, credit cards, real estate, and commercial loans. And they've generally been more successful than banks.
While banks can fund them selves with relatively stab posits, finance companies end up benefiting by their reliance on the short-term commercial paper market, said William Bowen of the First Manhattan Consulting Group.
"When you have to fund billions of dollars of loans in the commercial paper market, it concentrates the mind," he said. "You make sure you understand what you will earn on the loans, and you go after the most attractive loans."
Careful Judges of Risk
Mr. Bowen believes that finance companies are better able to assess risk than commercial banks. For example, he said, bankers weigh a potential borrower's deposit business when they think about making a loan. Finance companies don't.
"This is our only business," said Thomas P. Shippee, senior vice president and division manager at Norwest Financial Services Inc. …