Credit Risk and Bad Debt Management in the UK Retail Lending Market

Transcription

1 A Datamonitor report Credit Risk and Bad Debt Management in the UK Retail Lending Market Published: Jul-06 Product Code: Scope: Covers both the unsecured and secured lending markets including credit cards, unsecured personal loans and mortgages Examines how consumer debt has increased over the years and how the IVA, bankruptcy and Debt Management Plan industries are growing Analyzes bad debt management strategies among retail lenders Use this report to... Covers the debt collection sector Gain a thorough insight into the issue of increased consumer debt in the UK

2 Credit Risk and Bad Debt Management in the UK Retail Lending Market Introduction With many consumers struggling with their debt commitments, lenders have seen an increase in bad debts prompting them to take a number of measures to deal with the situation. So, how indebted are consumers? How serious is the issue? What measures are consumer credit providers and mortgage lenders adopting to improve the quality of their lending portfolio? This report provides the answers. This report is essential reading for all financial services organizations operating in the retail lending industry. It provides an insight into the strategies being adopted by the sector to curb bad debts. Within these organizations the following will find this brief invaluable: directors, business development managers, business analysts and researchers, strategic planners and product managers. Key findings and highlights IVA companies have been keen to promote IVAs as a solution for debt-laden consumers via heavy advertising through various channels such as TV, radio, newspapers, yellow pages and the Internet. For instance, the CCCS mentioned that Debt Free Direct a major IVAspecialized company spent on average 1,500 in advertising per IVA client in The Banking Code Standards Board has introduced new rules to strengthen its code of practice. While it is a positive step towards tackling overindebtedness and curbing bad debts in the future, it may be a case of too little too late for the minority of customers who are already saddled with huge amounts of debts. Lenders such as Abbey, Barclays and Egg are targeting those credit card customers who are borrowing on their credit card over a long-term period and have accumulated high balances on their card to consolidate their credit card debt into an unsecured loan. This approach enables the lender to better manage bad debts. Reasons to buy Gain a thorough insight into the issue of increased consumer debt in the UK Learn about your competitors' strategies to curb bad debt in the future Learn about your competitors' strategies to recover bad debt Contact us... From Europe: tel: fax: fsinfo@datamonitor.com From Germany: tel: fax: deinfo@datamonitor.com From the US: tel: fax: usinfo@datamonitor.com From Asia Pacific: tel: fax: apinfo@datamonitor.com

3 Sample pages from the report Overview of Consumer Debt in the UK from 2001 to However, it is worth noting that the growth observed in the past year is slower than in per cent as compared to 8.9 per cent. Indeed, consumer spending was subdued in 2005, as consumers adopted a cautious approach to their personal finances in the wake of a weaker economy and increasing credit commitments. Moreover, lenders have been tightening their lending criteria in their bid to curb bad debts, as discussed in the next chapter. Figure 4: The average consumer debt increased by 5.0 per cent to 4,122 in 2005, Average consumer credit balances outstanding per adult, 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, ,090 CAGR =7.5% 3,423 3, Note: based on UK population over 18 years of age Source: Datamonitor analysis of ONS, BBA Finance and Leasing Association, Bank of England and APACS data 3,927 4,122 Overview of Consumer Debt in the UK Figure 6: Number of debt management plans arranged by the CCCS 25,000 20,000 D A T A M O N I T O R 15,000 Debt management plans arranged by the CCCS have risen significantly, AAGR = 26.3 per cent 10,000 Debt-laden consumers are increasingly seeking solutions to their debt problems as personal debt reaches high levels Credit Risk and Bad Debt Management 5,000 As an increasing number of consumers are buckling under financial pressure, many in the Retail Lending Industry are seeking external help to find a solution to their debt worries. Indeed, an increasing number of individuals are having recourse to Debt Management Plans (DMPs), 0 Individual Voluntary Arrangements (IVAs) and bankruptcies the three major options Moreover, the ratio of debt write-offs to balances outstanding has also available to those with debt problems to sort out their debt troubles. Note: Corresponding data in the Appendix increased, albeit marginally Source: Datamonitor, CCCS D A T A M O N I T O R With bad debts becoming more of a concern, many lenders have argued that bad debts have increased in line with their lending business. The graphic below, which plots debt write-offs for individuals by UK banks against balances outstanding, does The fact that debt solutions companies are prospering Credit Risk and Bad Debt Management in the UK Retail Lending Market highlight has that led debt to write-offs have increased as UK banks lending book has grown in increasing investor interest Datamonitor (Published 07/2006) Page 17 size. However, it also highlights that the proportion of debt write-offs to balances This report is a licensed product and is not to be photocopied outstanding has increased slightly over the years, rising from 0.6 per cent in 2004 to The debt solutions industry is currently prospering, given that many 0.7 per households cent in 2005, are thus stressing that bad debts have increased at a higher rate struggling with debt repayments and seeking debt solutions. As mentioned than lenders previously, lending books. many debt management companies are currently expanding their resources, as requests from financially troubled individuals flood in. For instance, Figure Debt 11: Free Direct Debt write-offs as a proportion of balances outstanding have has created 46 new customer sales and customer service positions at its contact increased slightly, center in Chorley. According to press coverage, the company s personal bankruptcy business currently accounts for a fifth of the UK market. Debt write-offs Moreover, as the number of individuals entering in IVAs soars, debt management Balances outstanding agencies are being encouraged to expand their IVA services. For instance, two leading players in the debt management sector, Bains & Ernst and Gregory Debt write-offs as a proportion of 800,000 balances outstanding Pennington, have specialist IVA subsidiaries. Bains & Ernst launched its IVA business, Blair Endersby, in 2004 whereas Gregory Pennington launched 700,000 Freeman Jones in , ,000 Credit Risk and Bad Debt Management in the UK Retail Lending Market 400,000 Datamonitor (Published 07/2006) Page 23 This report is a licensed product and is not to be photocopied Balances outstanding and debt write-offs, m 300, , , bn 3.0bn 3.6bn 4.2bn 5.3bn % 0.7% 0.6% 0.5% 0.4% 0.3% 0.2% 0.1% 0.0% Debt write-offs as a proportion of balances outstanding Notes: Debt write-offs for individuals by UK banks. Balances outstanding represents outstanding net lending (non-seasonally adjusted) for UK banks to individuals and housing associations. Balances outstanding data as at year-end. Source: Datamonitor, Bank of England D A T A M O N I T O R Credit Risk and Bad Debt Management in the UK Retail Lending Market Datamonitor (Published 07/2006) Page 38 This report is a licensed product and is not to be photocopied Request more sample pages...for FREE! From Europe: tel: fax: fsinfo@datamonitor.com From Germany: tel: fax: deinfo@datamonitor.com From the US: tel: fax: usinfo@datamonitor.com From Asia Pacific: tel: fax: apinfo@datamonitor.com

4 Credit Risk and Bad Debt Management in the UK Retail Lending Market Table of contents CHAPTER 1 INTRODUCTION Scope of the report Who is the target reader? How to use this report CHAPTER 2 OVERVIEW OF CONSUMER DEBT IN THE UK Introduction Consumer debt has increased in recent years causing fears of overindebtedness - An increasing number of households are facing debt problems - The average UK adult owed 4,122 in unsecured debt at the end of 2005, representing an increase of 5.0 per cent over 2004 levels Debt-laden consumers are increasingly seeking solutions to their debt problems as personal debt reaches high levels - Many debt-troubled consumers are reaching a solution to their debt problems via DMPs, IVAs and bankruptcies - The fact that debt solutions companies are prospering has led to increasing investor interest - A few issues have surfaced, as the number of consumers seeking debt solutions has increased significantly Increased concerns about consumer overindebtedness have prompted the financial services industry to react - The FSA launched an online debt test to help borrowers assess whether they are likely to run into financial difficulties - The Banking Code Standards Board has strengthened their code of practice However, there are signs that debt problems may get worse as households are now more vulnerable to economic upsets - While economic prospects for 2006 look less pessimistic, the overall picture remains sluggish Conclusion CHAPTER 3 CREDIT RISK AND BAD DEBT MANAGEMENT IN THE RETAIL LENDING INDUSTRY Introduction Lenders are feeling increased pressure on their business as bad debts are creeping up - Borrowers' difficulties in meeting repayments have started to feed through to lenders' secured books - Debts write-offs by UK banks on lending to individuals accelerated in The majority of lenders have witnessed an increase in arrears levels and impairment charges - Lenders have had to increase their provisions for bad and doubtful debts, as a result of consumers defaulting on their repayments Lenders are reconsidering their credit risk and bad debt management strategies in order to curb future bad debts - An increasing number of unsecured loan providers have now introduced more rigorous lending criteria - Sector caps are being used on seven-year term unsecured loans by Lloyds TSB - Credit card providers are putting less focus on mass-acquisition promotional offers - Unsecured lenders are encouraging their existing customers to consolidate high credit card balances into a personal loan with a view to turning unstructured debt into structured debt - Some credit card providers are using computer systems to automatically prevent deliquent customers from using their card - Slowly, lenders are partnering to share positive data on consumers in order to curb bad debts on their unsecured lending - In the absence of better data sharing, lenders are concentrating on cross-selling unsecured lending products to their existing customer base - Some lenders are now using consumer indebtedness indices from credit agencies to make a better lending judgment - A few lenders have increased their prices on some of their unsecured lending products in order to be in a better position to face higher risks of bad debt in the future Moreover, lenders are strengthening their collections function in a bid to limit impairment charges - Lenders are stepping up their debt collection activities by investing in technology - Lenders are increasingly making use of debt counsellors to help customers in financial trouble to sort out their finances - Third party debt collections agencies are increasingly being contracted by lenders Conclusion...There is a pressure on lenders for ensuring that Debt Collection Agencies used are following guidelines. We constantly monitor consumer complaints to detect unfair practices and take remedial actions... Industry source

5 CHAPTER 4 CONCLUSIONS Introduction A few points can be concluded from analysis presented previously - Bad debt has definitely become a worrying issue and is likely to get worse - Lenders do not have any control on past lending decisions but most appear to be doing enough to prepare themselves against future deterioration Going forward, lenders need to focus their efforts on a few areas - Lenders will gain by stepping up their collection processes - Co-operation with IVA agencies may assist in recouping some of the losses - Lenders should make data sharing a priority Table 12: Number of arrears and repossession on record, Table 13: Debt write-offs by UK banks, Table 14: Debt write-offs of UK banks as a proportion of balances outstanding for lending to individuals, CHAPTER 5 APPENDIX Supplementary data Definitions Research methodology Relevant readings Future readings Datamonitor's custom research capabilities The Retail Banking team LIST OF TABLES Table 1: Pros and cons of DMPs, IVAs and bankruptcies Table 2: Provision for bad and doubtful debt for a sample of lenders, Table 3: Typical APRs on unsecured loans of 5,000 for a sample of lenders, January 2005 and April 2006 Table 4: Interest rates on authorized overdrafts on current accounts for a sample of providers, January 2005 and April 2006 Table 5: Average unsecured debt and average debt to income ratio split by age group, 2006 Table 6: Average unsecured personal debt by region, 2006 Table 7: Number of bankruptcies and IVAs in Wales and England, Table 8: Debt management plans arranged by the CCCS, Table 9: Number of CCJs registered and on record, Table 10: Number of bankruptcies in England and Wales, e Table 11: ILO unemployed by age groups, indexed 1996=100, We have been tightening our credit strategies to reflect degeneration. We are reviewing our cut-off strategies. We are raising our thresholds in order to reject customers who we now consider too risky for our portfolio... Industry source

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7 Interested in this topic? Datamonitor's Retail Banking SPP is a vital tool for any organization seeking success in today's competitive retail banking arena. Focusing primarily on the UK, but continually extending its European and global coverage, the portfolio provides high quality information on general banking issues such as distribution, and the product areas of mortgages and unsecured consumer lending. Other reports available in this series UK Personal Lending 2006 This report provides a five-year forecast for the consumer credit market under three different scenarios and a detailed analysis of the challenges and issues lenders in the unsecured lending market are facing. Published: Feb-06 Product code: DMFS1817 UK Mortgages 2006 Datamonitor's annual report covers the hottest topics in the UK mortgage market such as rising bad debts, MPPI, pricing, acquisition and retention strategies. In addition, the report provides a five-year forecast based on three scenarios. Published: Jan-06 Product code: DMFS1816 UK Non-standard and Sub-Prime Mortgages 2006 Analyzes the market for mortgages to non-standard and sub-prime consumers. Sizes and forecasts the market, examines key market trends, discusses hot topics in the market and provides market share figures for leading providers. Published: Jul-06 Product code: DMFS1844 For more information about our products visit Subscribe to Monitor A monthly update of Datamonitor's new financial services products, delivered to you by . monitor@datamonitor.com

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