Increasing European SME access with Non-bank Lenders

The demand for credit from SMEs is increasing as European economies begin to recover from the most recent economic down turn. In addition, a large proportion of the credit raised by European SMEs between 2004 and 2007 is due to be refinanced by 2017. However, many of the markets which were the source of this finance are either closed or operating at reduced capacity.

Despite the gradual recovery in demand, with European regulators continuing to press banks to de-lever their balance sheets, and with the gradual withdrawal of expansionary monetary policies and liquidity support, it is becoming harder, not easier, for banks to lend. Local policy initiatives aimed at stimulating SME lending may prove insufficient to overcome these factors and help banks to satisfy credit demand in an improving economy.

In the longer term, banks’ ability to fund new lending will no doubt recover as investor confidence resumes and new bank capital comes on stream, Meanwhile, however, the next few years present a unique opportunity for non-banks with aspirations, capabilities and resources to expand their service offerings, to step into this market.

'Increasing European SME Access to Credit with Non-bank Lenders' looks at the European credit market over the next few years. During this period many SMEs could find that the supply of bank credit, and/or the terms on which it is offered - both of which are already demanding - will be an increasing challenge to their ongoing viability and growth prospects. What is the opportunity for non-bank institutions to fill this gap and gain market share? How can they develop lending businesses that complement their existing activities and capabilities? And what are the obstacles to this?

What is the opportunity for nonbank lenders?

PwC believes the shortfall in European SMEs’ supply of banking credit will last for at least five years and current alternative sources of credit are too small to have a meaningful effect. For non-banks looking to expand into this market, these conditions present an opportunity to make a move. This could be kick started through the selective purchase of loan portfolios which banks have deemed to be 'non-core'. Purchasing batches of these loans could give non-bank lenders a chance to bed down their systems and processes before advancing fresh credit.

Non-bank lenders should weigh up their options carefully, however, and avoid being too opportunistic. Financial buyers aside, there needs to be a longer term strategic/commercial logic to their actions, and there are also pitfalls in lending into a market simply because the demand is there, as banks have found to their cost!

What are the barriers to entry for non-bank lenders?

And despite the gap in the market, there are also short term barriers to entry for non-bank lenders (albeit comparatively low barriers by historical standards).

We group these into four areas.

National variations

European markets offer a very different scope for growth in non-bank lending due to market size, the fragmentation of credit conditions within the Eurozone, as well as the differences in borrowing costs in the various European countries.

Organisational requirements

Non-bank institutions acting as lenders will need to develop the right supporting structures and capabilities. At a minimum, this means acquiring in-house lending and credit risk management expertise.

Time to market

Setting up the right in-house structures should be quite straightforward, but identifying the right lending targets may take longer. European mid-market borrowers vary hugely in size, solvency and transparency, and it will take time for non-bank lenders to develop intermediary relationships and find borrowers that offer attractive returns at acceptable levels of risk.


So far regulation shows few signs of preventing non-bank institutions from entering the direct lending market. Growing conduct risk across Europe suggests that lenders would be wise to ensure that borrowers receive as much information as possible about costs, covenants and alternatives.