The dreaded word for card issuers like Barclaycard in 2006 is 'overindebtedness'. In announcing its annual results, parent firm Barclays has hinted that consumer overindebtedness is having a significant effect on its unsecured credit business. While still making a profit of GBP687 million in its credit card arm, the high street lender saw profits decline by 19% as it set aside a record GBP1 billion to cover losses generated by customers who cannot or will not pay their bills, a 44% increase on last year.
The rise in impairment charge was driven not so much by a rise in the number of Barclaycard customers failing to pay on time (as Barclays argues) but an increase in the balances that are not being paid off at all and a fall in the amount of money recovered by the bank.
It is likely that Barclays will not be the only lender to increase its bad debt provisions. Last year saw a large number of providers warn that credit impairment losses and provisions had increased, including Abbey, Alliance & Leicester, RBS, Lloyds TSB and RBS. It is likely that more banks will announce increases in provisions as 2006 progresses.
Lenders are now taking measures in order to avoid large scale exposure to arrears and defaults should the economic situation worsen. Barclaycard is now apparently turning away half of all applicants and it has reduced GBP330 million from customers' credit limits. Meanwhile, Alliance & Leicester is now turning down 60% of applicants, and HSBC told its advisors in 2005 to limit the amount of credit they can extend to GBP3,000. In addition, some lenders are focusing on cross-selling to their existing customer base rather than to new customers which is more risky.
Nevertheless, despite a bleaker outlook, lenders continue to maintain that bad debt is under control and that, although there is cause for concern, there is no need to panic. Only time will tell whether this is justified, but the more frugal and responsible outlook shown by banks in recent times is a prudent move.