Lenders slashing availability of unsecured debt - BofE

The Bank’s Credit Conditions Survey for the final three months of last year reports that lenders tightened their lending standards for granting unsecured consumer loan applications, something that the BofE will likely be pleased to see following governor Mark Carney’s comments last year that he was concerned about rising levels of consumer debt.

The survey found that availability of non-mortgage credit to households was reported by banks and building societies to have decreased across all four quarters of 2017.

The data showed that unsecured consumer credit growth slowed in November to be at the lowest rate since December 2015.

Specifically, unsecured consumer credit growth dipped to 9.1 per cent in November from 9.5 per cent in October, 9.8 per cent in September and 10.0 per cent in August.

It is down from a peak of 10.9 per cent in November 2016.

Net unsecured consumer borrowing amounted to £1.40b in November, similar to £1.36b in October and £1.41b in September. This is down from £1.73b in August 2017 and £1.91b in November 2016.

The Bank said that a further “significant” reduction in the amount of unsecured credit being made available to consumers and a further “significant” tightening of lending standards is expected in the first quarter of 2018.

Highlighting the need for increased caution, the survey also reported that default rates and losses increased for total unsecured lending in the fourth quarter of 2017, with further increases for both expected in the first quarter of 2018.

Howard Archer, chief economic advisor to the EY ITEM Club said: “The credit conditions survey for the fourth quarter of 2017 should go down well at the Bank of England given its view that recent rapid growth in consumer credit has created a “pocket of risk”. It should also take some comfort from banks reportedly tightening their lending standards for granting unsecured consumer credit.

“Specifically, the credit conditions survey reported that lenders further reined in the amount of unsecured credit available to consumers in the fourth quarter of 2017 (which was a fourth successive decline) and expect a further “significant” decrease to occur in the first quarter of 2018.

“Additionally, lenders were reported to have tightened their lending standards for granting unsecured consumer loan applications in the fourth quarter of 2017 with a further “significant” tightening of standards expected in the first quarter of 2018.

Mr Archer added: “In further good news for the Bank of England, there was an overall drop in demand for unsecured consumer credit in the fourth quarter of 2017. While demand for credit card lending was broadly stable, demand for other unsecured lending was reported to have fallen significantly. The survey observed that “this is the first material reported fall in demand for either component of unsecured lending since 2015 Q4.” Demand for unsecured consumer credit is expected to be stable in the first quarter of 2018.

“It may be that heightened uncertainties over the outlook and increased concerns over personal finances are encouraging some consumers to be more cautious in their borrowing. However, the persistent squeeze on consumer purchasing power is likely to continue to fuel the need for some consumers to borrow.

“It remains to be seen just how much effect the Bank of England’s interest rate hike has had on dampening consumers’ willingness to borrow. While the increase was just 25 basis points and interest rates are still at historically very low levels, there could well have been a significant psychological impact on potential borrowers given that it was the first interest rate hike since 2007.

“The Bank of England wants banks to provide evidence that they are lending responsibly to consumers and have not become complacent, but has stopped short of tightening borrowing controls. The Bank of England’s Financial Policy Committee (FPC) lifted banks’ countercyclical capital buffer back up from 0 per cent to 0.5 per cent last June and it announced in November that it will rise to 1 per cent with binding effect from November 2018. The Bank of England also indicated after its September FPC meeting that banks need to hold around an extra £10b in capital to guard against increased risks from rapidly rising unsecured consumer lending.”