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Sami
Beginning Saver
Joined: 17 Apr 2006
Posts: 39
Cash Points ££ 795.66
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 Posted: Tue Aug 08, 2006 2:16 am Post subject: Banks brace for bad debt pain to continue |
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LONDON (Reuters) - Higher interest rates and more relaxed bankruptcy laws threaten to inflict more bad debt pain on banks this half after they suffered an extra 700 million pound hit in the first half of the year.
More UK insolvencies, high fuel, utility and council tax bills, and the time lag before tighter lending has an impact are likely to delay any improvement in bad debts.
That is what banks had said last week as they reported a combined bad debt of almost 3.4 billion pounds for their UK operations, up 27 percent from a year earlier, according to Reuters estimates.
Banks have likened the time it takes for bad debts to feed through the system to "a pig moving through a python", and most said it would be premature to say the peak has been seen.
They tightened lending practices up to two years ago and now claim to be rejecting more credit card and personal loan requests and cutting limits on cards, but the second half of this year is likely to show little improvement in the scale of impairment charges, even if the pace of growth slows.
A quarter-point rise in interest rates last Thursday, the first increase for two years, will add pressure on consumers who have built up hefty debts in recent years.
And government data showing one person every five minutes is filing for insolvency in England and Wales backed up concerns that individual voluntary arrangements (IVAs) were swelling the bad debt problem.
IVAs allow debtors to repay part of their debt over a set time scale, in co-operation with an insolvency practitioner.
Paul Latham, finance director at Debt Free Direct , an insolvency adviser, reckons the annual number of IVAs is likely to rise to about 100,000, five times last year's level, before stabilising.
"It's the tip of the iceberg. There is a huge number of people who are already irreversably over-indebted. They will never be able to repay it," Latham told Reuters.
"People think that stopping lending solves the problem, but they are forgetting there is a huge reservoir of people who have already over-borrowed by a huge amount."
The Enterprise Act of 2004 was intended to stimulate entrepreneurship by removing the stigma of bankruptcy, but some banks said it had caused the jump in IVAs.
"What unfortunately has happened is that it has been taken by consumers rather than entrepreneurs, and it's being used as a device to walk away from a contract of debt," said Eric Daniels, chief executive of Lloyds TSB , Britain's biggest unsecured lender and one of the first banks to pinpoint the new law as potentially a big problem.
He criticised advice being given to encourage individuals to default -- echoed by HSBC's chief executive -- and said there appeared to be a societal shift in attitude towards debt.
Other banks were more sanguine and said they had to work within the new framework and be selective who to lend to, while Debt Free Direct's Latham said the complaints about IVAs was partly to deflect criticism from lending practices.
"To put it into context, the banking industry spent about 300 million (pounds) last year on advertising to encourage people to borrow money. People like ourselves spent 3 million pounds to make consumers aware they could turn to someone for free," he said.
Latham did agree that there should be better regulation to protect both debtors and lenders, however.
The department of trade and industry said the Insolvency Service continues to assess the effectiveness of the Enterprise Act's insolvency changes, and a report is expected to be released next year.
Impairment charges were also bloated by signs that a structural shift by consumers to carry more debt in recent years inevitably means defaults also rise.
That is likely to keep pressure on the lending models and scorecards used by banks to screen applicants and spot problems.
Lloyds TSB said its impairment charge shouldn't rise in the second half, but others were more reluctant to call a peak of the cycle just yet.
"It's too early to call a turn. The environmental conditions that are putting pressure on some UK households remain," said John Varley, chief executive of Barclays , whose Barclaycard unit showed a 37 percent rise in bad debts.
Fortunately for the banks, however, the increase comes at a time when group operating profits are generally buoyant, especially for those involved in investment banking, notably HSBC, Royal Bank of Scotland and Barclays.
The banks reported first-half profits of almost 20 billion pounds, up about 20 percent from a year earlier. |
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