Westpac has emerged as the provider of most of the funding that allows Cash Converters to lend small amounts of money at extremely high interest rates.
Westpac recently brokered a two-year facility to provide the pay-day lender with $60 million in funding via a "securitisation warehouse facility" secured against Cash Converters' Australian-based loans book.
The deal is structured so that Westpac funds up to 70 per cent of the loans sitting in Cash Converters' lending book and as the size of that loans book increases the capacity for Cash Converters to draw from it also increases.
Details of the funding agreement follow Cash Converters being hit last week with a $40 million class action in NSW amid claims it had been charging excessive interest rates on personal loans.
Banks are generally wary of the pay-day lending market given the reputational risks involved in writing short-term loans at high rates to low-income earners.
Law firm Maurice Blackburn initiated the class action against Cash Converters in the Federal Court, alleging some customers had been paying interest rates of up to 633 per cent, despite laws in NSW capping such rates at 48 per cent.
Cash Converters said it would vigorously defend the class action, saying the loans in question were not unlawful.
The recently negotiated Westpac deal will run for a minimum of two years, with an option to extend it. At the end of June, Cash Converters had drawn down the facility by $52.1 million, documents show.
A Westpac spokesman declined to comment on the class action but said the bank knew that Cash Converters' business involved payday lending.
"[But] with any customer that we lend to, we have processes to ensure that they remain compliant with all laws and regulations ... we conduct rigorous due diligence and work closely with our customers as a matter of practice."
Last week, the Consumer Action Law Centre welcomed Maurice Blackburn's class action against Cash Converters, which is Australia's biggest pay-day lender, saying it would shine a light on an industry where people often fall into cycles of debt that are difficult to escape from.
"The desperately sad thing is that pay-day loans are generally given to people on very low incomes, the very people who can least afford to be paying a premium for credit," Consumer Action chief executive Gerard Brody said. Most borrowers got a Centrelink payment.
"So clearly this is an industry that makes its money from highly vulnerable people," Mr Brody said.
Maurice Blackburn's Ben Slade said Cash Converters was the only company named in the class action.
"[But] like the Commonwealth Bank in relation to Bankwest, ANZ in relation to Gunns and now Westpac in relation to Cash Converters, there are in many people's view social responsibility obligations on the big financial institutions to at least know what's happening with their facilities," Mr Slade said.
Lloyds deal puts focus on
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