UK retail bank Lloyds TSB has issued a warning over levels of consumer debt.
21 Jun 2005, 18:54 GMT - Lloyds TSB [LLOY.L] has become the latest UK bank to warn that consumers are increasingly struggling to make repayments on personal loans and credit cards. Overall there is no need yet for banks to panic over consumers defaulting, but banks should still consider scaling down their aggressive sales tactics for cards and loan services.
Amid low interest rates and a booming housing sector, consumer spending has soared in recent years. However, following a number of interest rate rises, the economic climate has changed, and consumer spending and the housing sector have both slowed. Now an increasing number of consumers are having trouble paying off the debt from their past spending splurges.
As the interest rate has risen, mortgage repayments have been most affected. For a large proportion of consumers, higher mortgage repayments have meant that secondary repayments, such as credit cards and loans, are now less affordable.
The issue of UK overindebtedness is already a well-debated issue. As yet another bank admits to an increase in arrears and bad debt, the question arises as to whether this is an indication of what is to come as a result of consumer overspending.
If the UK were to go into a recession, with the current level of consumer debt many banks are vulnerable to the consequences of enormous defaults and arrears. This suggests that during the early 2000s they had been over-eager to capture new business and sought too many unreliable customers.
However, it is crucial to note that the other main indicators of overindebtedness are not currently displaying typical danger signals - quite the opposite in fact. Mortgage repossessions are still at their lowest point for years, and the number of CCJs (those consumers with county court judgment records) and non-standard consumers also continue to decrease.
Nevertheless, in order to avoid large-scale exposure to arrears and defaults, banks will need to reconsider their existing model of customer acquisition in credit cards and loans. Whereas during the last five years banks have generally led with aggressive tactics in order to gain additional market share, they may now have to take a more backseat approach in order to reduce the risk of bad debts.