There is an ongoing paradox at the heart of what has become known as Britain’s cost of living crisis. With inflation still running at more than 10 per cent, Citizens Advice, which provides free guidance on debt issues and other consumer worries, said recently it had helped a record number of more than 600,000 people in the first four months of the year, up 6 per cent on the same period of 2022.
And yet Britain’s banks are reporting little evidence of their customers falling behind with payments on their borrowing. For the first quarter of the year Lloyds, the country’s biggest high street lender, increased credit provisioning a little, but the tally of retail customer loans classified as impaired remained stable — at just 1.2 per cent of the total. Profits were up nearly 50 per cent, thanks to an expanded spread between what it pays out to depositors and what it charges borrowers. Other banks reported similar trends.
The pattern is playing out elsewhere in the world. Yes, there have been some dramatic banking collapses — among US regional groups and in Switzerland. But these were lenders that failed because of panicked depositor runs, lax regulation and generally bad management. They did not get into trouble for the prosaic reasons you might have predicted: higher interest rates leading to customers unable to afford their borrowing.
The dissonance is partly explained by delayed impact: it takes a while for an individual with a stretched budget to default on a credit card and for that to feed through to quarterly results.
But bankers and campaigners alike reckon there is another explanation: increasing numbers of people are being frozen out of the formal banking system, so do not show up as problem borrowers.
Plend, a peer-to-peer lending platform published research recently suggesting the number of people who feel “locked out” of the financial system jumped by 40 per cent last year, as banks cut back on riskier lending: more than a quarter of the UK population now feels financially excluded and the figure is nearly half for black and minority ethnic communities.
UKFinance, a lobby group that represents banks and other financial groups, argues regulation is a big part of the problem. Tough risk controls, and restrictions on high-interest products, have meant banks have been driven to shed poorer clients.
At the same time, unregulated money lenders or poorly regulated financial technology operators, such as the rampant buy-now-pay-later industry, have been filling the gap. NatWest retail chief David Lindberg told the FT recently of his concern about the growth of the high-cost “shadow credit” system.
The FT-backed Financial Literacy and Inclusion Campaign charity is committed to highlighting problems caused by these dynamics and promotes better financial education.
Another charity, Fair4All Finance, which administers the hundreds of millions of pounds left in dormant bank accounts, is intervening directly in broken parts of the lending market to relieve pressure on the most indebted individuals.
It has spent recent months conducting a pilot study in south Manchester, involving local credit unions and not-for-profits, which have extended loans of a few hundred pounds apiece on an interest-free basis to those in need.
To expand nationwide, the support of big lenders is essential, but they are loath to provide it. Bankers argue the affordability benefits of an interest-free arrangement over something at commercial rates is marginal, making the initiative unnecessary. Fair4All says that misses the point: the no-interest loan brings people into the mainstream who otherwise would not be accepted as borrowers, giving them a chance to build a credit repayment history. A third of those in the pilot who have repaid their money have gone on to qualify for commercial loans.
Banks for their part are finally dealing with another aspect of financial exclusion with an initiative to open 200-300 shared branches — or “banking hubs” — over the coming three years in locations where the last bank has closed down. (So far there are five.)
The recent dramas in the US and Switzerland have shaken public trust in banking for the second time in 15 years. Even if those problems do not spread, credit conditions are already tightening. It is imperative for their licence to operate that banks — and the policymakers that direct them — ensure credit risks are managed thoughtfully and not by pursuing a strategy of financial exclusion.
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