Consumer, household and business lending rose during the second quarter of the year, but lenders have been warned that higher default rates are on the horizon.
According to the latest Credit Conditions Survey by the Bank of England, lending volumes increased across the board between April and June 2021, as the government loan schemes began to wind down.
Business lending increased slightly in the three months to the end of May 2021, and the central bank has predicted that the supply of business credit will remain unchanged in the next three months of the year.
Looking ahead to the third quarter of the year, default rates for small- and medium-sized enterprises (SMEs) are expected to rise, but large corporates are set to reduce their debt and lower their default rates as the economy reopens, the central bank said.
“Borrowing is flowing thick and fast,” said Sarah Coles, personal finance analyst at Hargreaves Lansdown.
“We’re keen to take on more debt and the banks are equally enthusiastic about lending, because they’re optimistic about the economy, and want to grab market share while they can. But while the tap is firmly turned on, some borrowers risk sinking underwater, and defaults on all kinds of household borrowing are expected to rise.”
Coles pointed out that banks expect defaults on credit cards, loans and mortgages to increase in the three months to September.
“As the furlough scheme is phased out over the summer, there’s a good chance that there will be job losses, and people who have been struggling to keep their head above water will finally succumb,” she added.
“At the end of July, the final mortgage holidays will come to an end too, so there won’t be help from industry-wide schemes. It means borrowers will have to rely on whatever they can arrange with their lender.
“Since the onset of the crisis, lenders have been cutting credit card limits, in an effort to keep a lid on their exposure to bad debts. They continued to do so in the three months to June and say they will do it again in the three months to September.”
Mortgage approvals also increased in the three months ending 30 June 2021, as house buyers rushed to make the most of the stamp duty exemption. However, the Bank of England has warned that demand for home purchases is set to reduce in the third quarter of the year. The central bank also predicted rising defaults in the mortgage market.
In the unsecured personal lending market, there was some evidence that consumer borrowing is on the rise, with credit cards assuming the bulk of this lending. The Bank of England expects consumer lending to increase even further in the third quarter of the year, with default rates also set to rise.
“Nothing hugely surprising here,” said John Cronin, an analyst at Goodbody.
“The data shows that the uplift in demand for credit cards is weaker than for other unsecured lending product, which is unsurprising given history tells us there is a lag in demand pick-up in the case of credit card balances – and this is consistent with what we have been hearing from the high street banks.
“We remain optimistic that credit card lending will be a source of loan growth for the banking sector in due course but we are cautious in relation to how quickly this will unfold – indeed, while spending will pick up, repayments will likely run at a higher run rate than historically given savings build and the consequential improved ability to repay on time on the part of credit card customers.”