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.

Unlikely Candidates

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., the second-biggest bank-owned finance company after BankAmerica Financial Services System.

"We don't have managers looking for fee income or checking accounts," he said. "We are focused on making loans. If we aren't making loans, that's all we talk about."

Businesses Monitored

When finance companies lend money to fund new inventory or accounts receivable, for example, they will monitor the borrower's business very carefully, right down to checking what goods are shipped. Most banks don't watch their borrowers that closely, said Mr. Bowen.

That single-mindedness has paid off in high growth and good profits. Business loans at finance companies nearly doubled between 1985 and 1991. During those seven years, banks' business credits grew only 24%.

"Generally, finance companies are more profitable than banks," said Nancy Stroker, a managing director with Fitch Investors Service. "They have higher margins, controlled chargeoffs, and good expense control."

Estimated ROA of 2%

Ms. Stroker estimated that finance companies typically have a 2% returns on assets, about double that of banks. Studies by the Federal Reserve banks of Chicago and New York show that finance companies were consistently more profitable than commercial banks over most of the 1980S.

Although they appear to lend to less creditworthy customers, finance companies take less risk than banks, said Ms. Stroker. Finance companies have generally higher levels of capital than banks, for example.

Home equity loans, it business pioneered by banks, is another area in which finance companies have made inroads.

Two of the biggest home equity lenders are Household Finance Corp., Prospects Heights, Ill., and Beneficial Corp., Wilmington, Del.

While some banks own finance companies, many sold off such units in the 1980s to raise equity.

There are rumblings that banks may be interested in getting back into this business, said Ms. Stroker. NationsBank Corp., for example, recently bought Chrysler First Financial, a finance company unit of Chrysler Corp.

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