Barclays: tough measures on bad debt

9th August 2005

Barclays has introduced measures to help tackle rising levels of bad debt.

While Barclays has released better than expected half-year profits, its consumer credit division has suffered a fall in profits due to increasing bad debt in the UK. In response, Barclays is now raising its approval standards in order to stem the tide - a move that other banks are likely to mimic. However, while Barclays has escaped relatively unscathed, others might not be so fortunate.

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Despite a weakened performance from its Barclaycard consumer credit division, Barclays has delivered better-than-expected results, posting half-year pre-tax profits of GBP2.69 billion.

The bank's bad debt provisions swelled 20% to GBP706 million in the half year to the end of June, mainly because credit card customers struggled to repay their bills. In addition, Barclays saw a 16% rise in its retail division's bad debt charge.

Barclays was the first group to warn back in May that the UK's increasing levels of bad debt could hurt overall profits. Other large lenders soon followed in admitting rising bad debt on credit cards and personal loans; for example, HSBC recently announced a 20% rise in its bad debt provisions and an increase in impairment charges.

In light of the problem, Barclays has reacted to stem the decline in payment arrears and defaults by adopting more rigorous assessments of applications, and cutting the credit limits of 80,000 cardholders. It now rejects half of all credit card applications.

This marks a reversal in strategy from recent years, when banks generally used aggressive tactics to grow market share. This approach was possible during a time when consumer spending soared amid low interest rates and a booming housing sector. However, following a number of interest rate rises, the economic climate has changed and both consumer spending and the housing sector have slowed. Now an increasing number of consumers are facing difficulties in paying off the debt from past spending splurges.

Barclays is one of the first banks to announce that it is taking more of a backseat approach. Other banks are likely to follow suit, tightening up their credit approval policies to reduce the risk of additional bad debt.

While Barclays has been able to overcome the recent surge in bad debt levels - mainly as a result of strong performances in its business and investment banking operations - others may not be so lucky. Lenders or non-financial organizations that rely more heavily on their credit card or personal loan divisions may suffer more serious repercussions.
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