Britain’s credit card binge could be at an end as banks tighten up controls on consumer debt.
Borrowing growth hit rates of more than 10pc over the past year, a pace not seen since the boom years before the financial crisis, but now banks are touching the brakes.
The Bank of England has warned that a consumer debt could be more of a risk to banks than mortgage lending, should there be an economic downturn.
Fierce competition to win new customers has led banks to offer more credit to customers with increasingly long interest-free periods.
But banks have started tightening lending criteria for credit card applicants in a move of an intensity not seen since the depths of the financial crisis in 2008 and 2009.
A net balance of 33pc of lenders expect to tighten standards in the coming three-month period, according to Bank of England data.
When unsecured loans are also included, a net balance of 27pc plan to scrutinise applications more closely.
There was also a fall in the number of credit card applications approved in the first quarter of the year, and banks expect the number to remain roughly steady in the coming quarter.
By contrast credit scoring criteria for secured loans, such as mortgages, is holding broadly steady.
“The recent rapid growth in consumer credit could principally represent a risk to lenders if accompanied by weaker underwriting standards,” warned the Bank of England’s Financial Policy Committee this month.
Economists said it is good news that banks are lending more carefully, preempting any debt-related problems in the economy.
"The Bank of England will be pleased to see lenders tightened credit scoring criteria for unsecured lending in the first quarter and expect to tighten them significantly further in the second quarter (particularly for credit cards)," said Howard Archer, chief UK and European economist at IHS Markit.
"If the fundamentals for consumers do weaken further as expected over the coming months, it is vital that banks adopt tight lending standards in granting unsecured consumer credit, or it risks causing serious debt problems for the economy. This would be reinforced if the Bank of England felt compelled to raise interest rates due to mounting concern over the potential inflation overshoot."
Meanwhile, banks said that demand for business loans is weak, particularly from mid-sized firms, indicating companies are holding back from new investment projects.
“Lower capital investment was reported to be exerting a significant drag on demand for corporate lending in the first quarter, although increased merger and acquisition activity had pushed up on demand,” said the Bank of England’s credit conditions survey.
Business confidence deteriorated after the EU referendum, as companies became less sure of the UK's future trading relationship with the remaining EU nations.
Strong economic growth since then, combined with an export boost from the lower pound, has helped them recover some confidence, but the latest figures indicate this is not yet feeding through into extra borrowing and investment.
The Bank of England fears that raising interest rates could damage the economy’s recovery, but is keen to push banks to lend more carefully.
In 2014 it imposed limits on mortgage lending, restricting the number of loans that financial institutions could give to borrowers who were taking on loans amounting to more than 4.5-times their income, in the hope of preventing a dangerous bubble in risky mortgage lending.
0 comments: