Banks may avoid worst of household debt pain

By Clara Ferreira-Marques - Analysis

LONDON (Reuters) - Action taken by UK banks to rein in personal lending after a spike in bad debts two years ago could help them avoid crippling losses on consumer business as the economy nears recession and pressures on households increase.

Still counting the mounting cost of the credit crunch, the banks are now faced with a broader economic slowdown and most lenders had rising arrears in home loans and among corporate customers in the first half of 2008.

Thanks to tighter practices and lower consumer credit balances, no major bank in Europe's most indebted country reported serious warning signs in unsecured losses -- leaving more concern about the future for bad debts in mortgages than in household loans and credit cards.

"It is not as if it is not going to cause the banks any pain, but because ... they've been dealing with it for the past few years, it won't be as bad as it could have been," analyst Leigh Goodwin at Fox-Pitt, Kelton said.

"If the banks had been coming off very low levels (of impairments), and had not tightened their lending criteria and risk modelling -- as was the case going into previous recessions -- all hell could have broken loose."

In Britain, the only country in Europe to have more credit cards than people, bad debts hit a peak around 2006, on the back of simplified bankruptcy legislation combined with several years of aggressive lending from banks keen to grab a slice of the lucrative credit card and loan market.

After a year of sobering impairment charges -- particularly at large consumer loan providers like Barclays (BARC.L), Lloyds TSB (LLOY.L) and at growing players like HBOS HBOS.L -- banks tightened up their practices and lending criteria.

At HSBC (HSBA.L), for example, branch employees are no longer allowed to override a rejection from the bank's formal system of approving loans, and it grants personal loans only to customers with a current account, which allows it to check affordability.