Banks expect to cut back on lending

6:32pm Thursday 2nd October 2008

Banks and building societies plan to further cut back on lending to individuals and businesses in the face of the worsening economic outlook, an official report showed.

Lending to households and companies has already fallen steeply since the credit crunch first struck, but lenders anticipate a further tightening in the availability of credit during the final three months of the year.

They also said they had cut back on the amount they advanced by more than they had expected during the previous three months, according to the Bank of England's Credit Conditions Survey.

Concerns about the economic outlook, falling house prices and a reduced appetite for risk were the main reasons cited by lenders for reducing the amount they advanced.

These factors, combined with tighter wholesale markets, were also expected to reduce lending going forward.

But lenders also reported a rise in the number of people and businesses defaulting on loans, and this trend is expected to continue.

Overall, a net balance of 44.8% of lenders had seen rising defaults by households, and 50.1% expected this to continue during the coming three months, while a balance of 36% had seen a jump in corporate defaults.

At the same time losses on households and business defaults have also risen, with banks anticipating further growth in losses during the coming three months.

Lenders said they mainly reduced the availability of mortgages through tightening their credit scoring criteria and reducing the maximum loan to value ratio that they were prepared to advance, although the survey found that for people with at least a 25% deposit availability had actually increased.

During the coming three months lenders expect to further tighten their lending criteria. But the cost of mortgages remained broadly unchanged during the period, with rates for prime borrowers actually falling slightly, and margins are expected to continue to narrow going forward.

AROUND THE SITE