The Bank of Israel restricts banks in collecting early repayment fees (photo by Rami Zerniger, Yossi Zellinger, Yitzhak Gadi Dagon, Yachatz-Avshalom Shashoni, Oren Dai)
The “Yonet Credit” and “Backup” cases flood the surface with the most significant differences between the banking system and its non-banking company. The core of the differences is in the underwriting worlds, but make no mistake, even in the managerial quality and corporate governance that leads to one major unfortunate conclusion: reducing the share of banks in Israel’s economic life is far from non-existent.
We will leave for a moment the criminal suspicions in “Yonet Credit” and understand for a moment the mechanism of the world of financing. In principle, the volume of business debt in Israel, as of the end of 2021, amounts to NIS 1.1 trillion. For the first time, the business debt crossed the NIS 1 trillion mark in March 2021. As of last June, the companies on the stock exchange raised about NIS 45 billion, half of which was raised by the banks.
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According to a report by the Strum Committee, which thoroughly researched the Israeli credit market, half of the debt of the business sector, which does not include banks and financial institutions, is in the hands of the banking system and half is with non-banking companies.
If so, who are the non-banking companies that hold half of the business credit and compete with the banks: first and foremost, these are the insurance companies that manage huge sums of pension funds of the Israeli public. This amount is increased every month by a net NIS 4 billion that comes from the pension provision of every employee in Israel.
This money needs to find an investment solution and this is where investment managers send it to the stock market. Once for the worlds of stocks and once for the worlds of bonds. Here things get complicated. Because of the low interest rates and their high price on the stock market, the institutional investors, even the most aggressive ones, have started looking for alternatives to traditional stock market investments.
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They started investing in real estate, continued in partnerships in the trading worlds and then came the year 2021 and a new star was born – non-bank credit.
To convince you (the retiree public who also happens to be monitoring their investments) that they know what they are doing, the investment managers (by the way, not only in the insurance companies, you will also find them in the private investment houses) they decided to enter the world of non-bank financing. And how will they do it? In principle, there were entities that set up a “home” lending system, developed a credit model, marked a segment and set off.
But there were also those who did not want to set up this array at home and went into investments in other companies that are supposed to develop the right methodology and make intelligent use of your money.
Here the plot gets a little more complicated: to use money that started flowing freely in all directions, these companies recruited more or less junior bankers who thought they knew how to take out underwriting like in banks but make the decision-making process more flexible, charge an appropriate interest rate (higher than the banking system) Everyone is happy.
But then we are exposed to the “United Credit” and “backup” affair (neutralizing criminal suspicions) and discover that the ability to make a quality underwriting, not in the banking system for its experience and knowledge, is almost non-existent. Because who are we dealing with here, with a customer that the bank did not want and not because the customer is not handsome in his eyes, but because the bank does not feel comfortable with the customer.
Our client decided that he was not making an effort to improve positions but was going, with all his excess risk, to a non-banking company that would actually lend him the money he received from the pension funds, provident and training funds and the money got there from our bank account and our pay slip.
If so, the money is not from the non-banking companies, the money is flowing freely in all directions (zero interest, lack of reasonable investment channels and so on) so why not take risks? 100 loans are given, 80 are sure to come back and with the interest we earn minus the money we lost – there will be a reasonable return. Oh well, it’s a shame they and the investment managers don’t do it with their money.
And now the plot gets a little more complicated: the days change quickly, Russia invades Ukraine, the supply chain goes wrong, inflation raises its head, central banks raise interest rates and here – the “weak hands” fall. Now the banks that hold the better customers with the better collateral and with the better repayment ability, survive this stage. But non-banking companies are less so.
Here one has to differentiate between different types of credit. A situation can arise where a bank, an insurance company and the bond market will compete for the exact same customer and he will choose a non-banking company because it makes decisions faster than the bank, because it is more flexible and does not have the Supervisor of Banks in mind. This is not the rule.
To understand how elusive the term “quality underwriting” is, let’s turn to the fashion that started last year (naturally we will not name the companies or whoever gave our pension money to get there, everyone should do their own account here – and there is a lot to do here) ” Maznin loans. ”
What is a Maznin loan? In order to receive banking support from a normal bank, the banks require the developer / contractor and so on (this is true not only for the real estate market but it is a more convenient example to understand) to provide equity for the project. NIS 750 if the contractor sees that he brings in NIS 250.
Now our contractor is spread over 10 buildings that ate up his equity. They will generate profits (with the help of the name) up the road, but right now they are consuming capital. Therefore, our contractor turns to a non-banking company that will give him NIS 250 at high interest and that is how the bank will give the NIS 750.
Now, in a utopian world, in the event of the bank’s failure to take its lien from the project, it will repay its NIS 750 and what will remain of the non-banking company (our pension will be mentioned) will be repaid. Do not get excited, there will not be much left to repay, if at all.
True, non-banking companies are becoming more sophisticated and discounting delayed relays. That is, if you have a store and received a check or credit card from a customer, then if you return the check to the non-banking company it will give you cash here and now for (high) interest that will be paid here and now.
Now let’s not exaggerate the words about the risks that are growing as the business increasingly needs short-term external capital inflows, it is clear to any reasonable person. But what happened to “Joint Credit” and “Backup” poured a bucket of cold water on the investment managers of our pension savings and if last year they were willing to give our money to anyone who agreed to receive it, then today they are still willing – but less.
What do these things mean? The implication is sharp, if it is not discovered that the “Yount” and “backup” affair are one-off and one-time events, then let’s say goodbye to the competition we expected in the worlds of non-bank credit. Surely this is the real one that was supposed to be a real competition to the banking system.