Consumers' Debt trap of payday loans in UK

 
A third of people experienced greater financial problems as a result of taking out a payday loan, according to Which?

Payday loans are trapping increasing numbers of consumers in a downward spiral of debt caused by exorbitant penalty charges, a consumer group has warned.

More than 60pc of people who take out payday loans are using the money for household bills or buying other essentials like food, nappies and petrol, a survey by Which? found.

The figures show an "alarming" picture of people trapped in debt caused by penalty charges because they cannot afford to pay back the loan on time, the watchdog said.

A quarter (25pc) of those who had taken out loans said they had been hit with hidden charges such as high fees for reminder letters, and one in five (18pc) were not able to pay back their loan on time.

A third of people (33pc) experienced greater financial problems as a result of taking out a payday loan, and 45pc of them were hit with unexpected charges.

Which? said the debt trap was compounded with 57pc being encouraged to take out further loans and 45pc rolling over their loans at least once.

A third of people (33pc) were bombarded with unsolicited calls, texts and emails before they had even signed an agreement.

The investigation of 34 payday loans companies' websites also found that customers could face a £150 charge by one company, Quid24.com, if they repaid their loan 10 days late. Most of the companies failed to show clearly their charges or charged excessive amounts for defaulting.

Consumers were also potentially being allowed to take on credit they could not afford, with eight out of 34 companies failing to carry out any credit checks as part of their approval procedure and nearly two-thirds of those surveyed not asked about any aspect of their financial situation apart from their salary.

Some websites failed to provide any terms and conditions and many of those that did had little or no information about a borrower's rights and obligations or references to free debt advice.

Which? is calling on the Office of Fair Trading to enforce existing consumer credit and lending rules that already apply to payday loans firms and to restrict the default charges that payday loans companies can charge.

Which? executive director Richard Lloyd said: "With 1.2 million people taking out a payday loan last year, it is unacceptable for this rapidly growing number of people to be inadequately protected from extortionate charges and dodgy marketing techniques.

"At its worst, this booming £2bn industry can be seriously bad news for borrowers who are struggling to afford food or pay their bills. People are getting caught up in a debt trap, whacked with high penalty charges, or encouraged to roll over payments and take out more loans at inflated rates.

"The regulator should properly enforce the existing rules that apply to this industry, but they must go further and impose a cap on the amount that lenders can charge for defaulting.

The Government should also now explore other ways to protect hard-pressed borrowers, including Australian-style measures to cap costs and promote affordable alternatives."

Consumer Focus director of financial services Sarah Brooks said: "This research throws up some extremely troubling findings and poses many uncomfortable questions about the growing payday loan sector.

We have long held concerns about the behaviour of some payday lenders and whether consumers are losing out because this industry is not regulated strongly enough.

"Our research in 2010 showed problems with inadequate affordability checks and borrowers being offered multiple new loans or roll-overs on existing loans. Which?'s findings suggest that problems have worsened in this industry and that more borrowers are finding themselves caught in debt traps. Millions are turning to these loans in the current economic climate and it is usually those on lower incomes that suffer most.

"This work is timely given the OFT's compliance review of payday lenders. There is clearly a continuing problem with payday loans and this should give further incentive, if any is needed, for the OFT to act quickly to protect consumers from spiralling debt." Telegrah

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Reining in household debt by Bank Negara Malaysia

The responsible lending guidelines, among the pre-emptive measures by Bank Negara to contain surging household debt, have made a strong impact on most people. Will the guidelines be effective to control the alarming levels of household debt and put the brakes on loan growth? 

THE responsible lending guidelines, which came into effect on Jan 1, created quite a stir in the banking industry with leading indicators signalling further signs of loan growth slowing in the coming months.

There is some discontent among consumers in terms of having their loans approved based on net income compared with gross income previously, in addition to which is the need for more documentation.

Some automotive players and property developers are not too happy either as they feel the move will be a dampener to their business moving forward. Loan growth for January was lower at 12.1% year-on-year (y-o-y), probably the slowest since 2010, compared with 13.6% y-o-y in December last year mainly due to slower growth in the household and business segments.

Total application and approval for loans in January was down almost 3% from a year ago although those disbursed rose by 5.6% y-o-y.

Loans in the household sector, which has a high level of indebtedness, was dragged down by slower growth in auto, mortgage and personal loans. But some quarters argue that this could be attributed to shorter working days in January due to the Lunar New Year break and other holidays.

Officials say that a loan growth in the region of 12% appears to be fine and much stronger growth may be a problem if left unchecked.

Indications are that loan growth to households, which was lower in 2011 than 2010, will normalise in February this year after the dip in January.

Whatever the arguments are, this trend, if it does continue, can be seen by some quarters as worrisome. Will loan growth then continue to slide? Some industry observers and analysts think so.

Loan growth mixed signals

Under the guidelines, banks are, among others, required to apply the net-income calculation method instead of gross income when computing the debt-service ratio for potential borrowers. The lending guidelines cover housing, personal and car loans, credit cards, receivables and loans for the purchase of securities.

Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias says based on indicators, the rating agency feel that loan growth will likely moderate this year to a single-digit figure compared with a 13.6% growth recorded last year.

Nor Zahidi says the stricter guidelines is a step in the right direction.

This is due to the fact that some potential borrowers will no longer be eligible for certain types of loans, he says. This, he adds, is evidenced by a steep drop in the volume of passenger cars sold in January by 25% compared with the same period last year following stricter hire-purchase loan processes.

Total vehicle sales, however, rebounded by 9% in February with industry sales hitting 44,013 units from 40,387 units in February 2011.

Going forward, Zahidi says he foresees further decline in the banking sector loan growth as banks continue to be extra prudent in their lending practices, adding that there are also declines in loan applications for cars, credit card and residential properties based on latest indicators.

Loan applications for purchases of passenger cars contracted by 15.5% in January from 7.8% growth in December 2011. Another significant drop was the application for the amount given to the credit card segment which fell by 50.9% in January from a decline of 10.2% in December 2011. Applications for loans for the purpose of purchasing residential properties contracted 6.3% from a growth of 11.3% in December 2011.

Approvals for loans categorised for “personal uses” declined by 29.8% compared with a 42.4% growth in December 2011 while the amount of loans approved for the purchase of passenger cars and residential properties contracted by 18.4% and 20.9% respectively in January (December 2011: 0.3% and 1.8% respectively).

The Association of Banks in Malaysia (ABM) says the implementation of the guidelines will not have a direct relation to its member banks' loan growth. Factors like global economic conditions and its impact on the regional economy as well as developments on the external and domestic front will be the more pertinent factors that will have an effect on loan growth, it says.

“The guidelines merely set out to better define the expectations of banks to act responsibly and transparently when lending. The policies and practices envisaged are not entirely new as they underscore the existing approach taken by our members. While it will ensure that the debt commitments of individuals and households are within their repayment capabilities, customers who can afford to repay will not be denied access to financing,” it says.

A robust retail finance market, ABM says, cannot be measured by loan growth alone as the obligations (financial and contractual) to repay, sound personal financial management skills and responsible financing practices are more important to the stability and sustainability of the market in the long run.

Weaker numbers

The occurance of non-performing loans and loans in arrears appear to be falling, and they are what bankers and regulators are paying close attention to. That will indicate that the responsible lending guidelines, even though they may crimp the longer-term trend, is not having an impact on the quality of existing loans.

Wong expects loan growth to taper to 8%-9% after clocking in a strong 14% last year.

 

CIMB Research says in one of its notes that it expects a slowdown in loan growth this year due to weaker numbers from all major loan segments including residential mortgages and auto loans.

RHB Research Institute considers that on the whole, the new guidelines will have some impact on household loan growth, but the extent of the impact remains to be seen.

As for demand for loans from the household segment, the research outfit does not think the growth will fall off the cliff, but rather will be at a more moderate pace relative to recent years.

Jupiter Securities head of research Pong Teng Siew feels that with the strict adherence to the lending guidelines, loan growth may hit 8% or less sometime later in the year but may pick up in some months.

OSK Research is maintaining its loan growth projection for this year at 9% despite the guidelines which it says will play a part in slowing loan growth. The projection was underpinned by Economic Transformation Programme (ETP) projects.

RAM Ratings head of financial institution ratings Wong Yin Ching expects loan growth to taper to 8%-9% after clocking in a strong 14% last year.

This, she says, will be supported by expectations of a real gross domestic product growth of 4.6% in 2012 (2011: 5.1%) and a more moderate household loan growth due to various prudential measures introduced since late-2010. Loans growth is said to be correleated to economic growth and with the Government seeing growth to come in at 4%-5% this year, expectations are that the pace of loans given out will accelerate at a slower pace.

Wong says the loan growth will be partly balanced by stronger financing demand from the corporate and commercial sector in anticipation of the rollout of projects under the ETP and 10th Malaysia Plan gaining momentum.

Meanwhile, Maybank IB Research, with a neutral call on the banking sector, says it expects domestic loan growth of 10.5% this year, up from its previous forecast of 9.4%, adding that mortgage lending is expected to hold up better than anticipated.

According to Bank Negara's Financial Stability and Payment Systems Report 2011, the growth of household debt to gross domestic product (GDP) increased last year but the pace was slower with outstanding household debts expanding by 12.5% to 76.6% for the year compared to 2010 when debt grew 13.7% to 75.8%.

It adds that signs of stabilisation in household debt relative to GDP was seen from the second half of last year after a continued upward quarterly trend observed since 2009 with borrowing continuing to be concentrated on residential properties and motor vehicles, which together account for 64% of total household debt.

The report states that bank lending to individuals earning more than RM3,000 per month accounted for about 80% of total loans to households by the banking system.

Choo says the guidelines will not have any adverse impact on those with genuine capacity to repay.

It adds that bank exposure to borrowers with monthly incomes of RM3,00 or less was relatively low representing less than 13% of total banking system loans. “Based on historical experience on the level of impairment and provisioning, any impairment losses to banks are not likely to exceed RM2bil or less than 8% of pre-tax profits of commercial and Islamic banks,” it notes.

The growth in household debts had also been accompanied by a corresponding expansion in household financial assets, it says, adding that stronger growth in household deposits which expanded by 12.2% balanced the slower increase in financial assets.

Timely move?

Despite the brouhaha surrounding the pre-emptive measure, many feel the introduction of the guidelines is timely and justifiable.

RAM's Wong views it as one of the many measures to contain the growth of household debt.

The banking system's household financing has been rising steadily over the last five years and currently constitutes about 55% of the system's total financing, she says, noting that the growth has stemmed mainly from home and personal loans.

As a result, she says, Malaysia's household debt-to-GDP ratio has trended upwards from 69% in 2006 to 77% in 2011. Compared to other countries in the region, this figure is considered high especially when looked at in relation to GDP per capita, she adds.

Some of the other pre-emptive measures which Bank Negara had earlier imposed to control rising household debt include tighter criteria for residential property financing, such as a 70% loan-to-value (LTV) cap on a borrower's third housing loan and beyond, as well as raising the income eligibility criteria for credit cards.

Some analysts concur that the lending guidelines are vital to ensure quality loan growth and some form of control is necessary. With ringgit deposits slowing, analysts expect banks to start pulling back on lending even in the absence of the guidelines.

Zahidi says the guidelines are introduced to ensure that the consumer segment will not be overstretched for too long. While it will take a few years before Malaysia's household debt can be reduced to below 60% of GDP, the stricter guidelines is a step in the right direction, he says.

However, he adds that this will have some adverse effects on the banking sector's loan growth as well as on private consumption.

OCBC Bank (M) Bhd country chief risk officer Choo Yee Kwan says credit assessments under the guidelines are done holistically by taking into account the total debt obligations of an individual borrower and will not have any adverse impact on those with genuine capacity to repay.

At the same time, he says, it will help to deter borrowings for speculative purposes and align debt burden more closely with repayment capacity.

 

Cavale says the long-term impact on banks is yet to be determined.

“While the guidelines are relatively prescriptive on the lending approach, they are really complementary when viewed from the vantage of a bank with more advanced risk assessment tools and portfolio screening and early warning triggers for sustainable loan portfolio health,” Choo explains.

A banking analyst from MIDF Research, on the other hand, thinks that while the guidelines on the whole are good, some details are vague and not properly spelt out. For example, there is no mention of specific details on liability as well as on debt servicing ratio, and is left to individual banks to assess the risk appetite of loan applicants.

Citibank Bhd managing director for cards and consumer lending Anand Cavale feels that while the guidelines will strengthen the control for lending, the long-term impact on banks is yet to be determined.

Although it will help reduce the level of household debt, this will depend on the state of the economy, as household debt is directly linked to the performance of the country's economy, he says.

While the guidelines will strengthen the overall ability to lend prudently, Cavale believes there should be proper infrastructure in place. For example, banks having accessible ways to the customer income information will help the process to implement the guidelines more smoothly, he points out.

Other areas of focus

Some analysts feel the stringent lending guidelines may cause banks to shift their focus to other areas to boost their bottomlines.

The MIDF Research analyst says banks may, for example, look to increase high net worth individuals or affluent customers for their credit cards as in the case of Malayan Banking Bhd. This, he adds, will include cross selling of cards to this segment.

For the mortgage side, banks may look into issuing more financing for landed properties in selected locations and for the auto business, they may source for stronger dealership, the analyst says.

Choo says OCBC Bank's objective is to derive 30% of its income from non-interest income sources, noting that it is keen to diversify and strengthen its deposit base to ensure it is not overly concentrated in any one specific segment.

According to Cavale, it is likely that banks will add other products or services that will support additional streams of income to mitigate potential reductions in the lending area.

Another area which banks are aggressively pursuing currently is the small and medium enterprise (SME) segment. This segment, according to an analyst with an investment bank, will provide better margins and probably make up for the shortfall in slower loan growth from the stringent guidelines.

Those banks which were not focusing on the SME segment will now have to employ strategies to capture this growing segment, he adds.
  
By DALJIT DHESI daljit@thestar.com.my

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Moody's declares Greece in default of debt

Bond credit rating agency says EU member has defaulted on its repayments as it secures biggest debt deal in history.



Moody's Investors Service has declared Greece in default on its debt after Athens carved out a deal with private creditors for a bond exchange that will write off $140 billion of its debt.

Moody's pointed out that even as 85.8 per cent of the holders of Greek-law bonds had signed onto the deal, the exercise of collective action clauses that Athens is applying to its bonds will force the remaining bondholders to participate.

Overall the cost to bondholders, based on the net present value of the debt, will be at least 70 per cent of the investment, Moody's said.

"According to Moody's definitions, this exchange represents a 'distressed exchange,' and therefore a debt default," the US-based rating firm said.

For one, "The exchange amounts to a diminished financial obligation relative to the original obligation."

Secondly, it "has the effect of allowing Greece to avoid payment default in the future."

Ahead of the debt deal, Moody's had already slashed Greece's credit grade to its lowest level, "C," and so there was no impact on the rating.

Moody's said it will revisit the rating to see how the debt writedown, and the second Eurozone bailout package, would affect its finances.

However, it added, at the beginning of March "Moody's had said that the risk of a default, even after the debt exchange has been completed, remains high."

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How American Consumers Handle an Ever-Growing Heap of Personal Debt?

Source: Cornell University Newswise — ITHACA, N.Y. – Got debt?

Probably. Most Americans do. Bombarded by home mortgages, college loans, credit card payments and car loans, the typical American consumer faces a mountain of financial obligations. Louis Hyman, Cornell assistant professor in the College of Industrial and Labor Relations, will speak to journalists about debt in his new book, “Borrow: The American Way of Debt,” on Friday, Feb. 10, 2012 at 10 a.m. at Cornell’s ILR Conference Center, sixth floor, 16 E. 34th St., Manhattan.



“Borrow: The American Way of Debt” is a lively, historical account of consumer debt in America, published by Vintage/Random House on Jan. 24, 2012.

In this society, debt is pervasive. Hyman says the average American owes more than $15,000 in credit card debt alone, and he provides a fresh look at the financial mess in which millions of Americans wallow. “Today’s problems are not as new as we think,” Hyman says.

“Borrow” examines how the rise of consumer credit – virtually unknown before the twentieth century – and how it has altered our culture and economy.

“My book puts today’s economy in context and helps explain how we got here, and then offers some novel solutions for today's troubles,” Hyman says

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Malaysia's public debt rises to RM407bil

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By EUGENE MAHALINGAM eugenicz@thestar.com.my

PETALING JAYA: Malaysia's public debt level rose 12.3% to RM407.11bil in 2010 from RM362.39bil a year earlier, according to the Auditor-General's Report 2010.

National debt grew 12% to RM390.36bil in 2010 from RM348.60bil a year earlier while foreign debt grew 21.5% to RM16.75bil from RM13.79bil in the previous corresponding period, said the report released yesterday.

In 2010, unresolved public debt both at the national and foreign level grew by RM41.76bil and RM2.96bil respectively compared with 2009.

“The national debt level totalling RM390.36bil accounts for 95.9% of the Federal Government's total debt,” auditor-general Tan Sri Ambrin Buang said in the report.

He pointed out that the ratio of the Federal Government's debt to gross domestic product at the end of 2010 was 53.1%, which was over 50% for the second year in a row.

The national debt level is governed by various laws that impose a debt ceiling for the Government. Under Act 637 of the Loan (Local) Act 1959, and Act 275 of the Government Investment Act 1983, it is stated that the combined loans raised domestically should not exceed a ceiling of 55% of the nation's GDP.

Meanwhile, Act 403 of the External Loans Act 1963 limits external loan exposure to RM35bil.

The report also revealed that in 2010, the Government received revenue totalling RM159.65bil, which was an increase of RM1.01bil (0.6%) compared with RM158.64bil in 2009.

Accounts receivable for 2010 stood at RM20.37bil while the Government approved allocation amounting to RM149.06bil for operating expenditure. “However, the said allocation was insufficient to cover the expenses amounting to RM151.63bil,” said the report.



The report also revealed the implementation of a rating system based on an accountability index.

“Through this rating system, marks will be given for the compliance if regulations of six main elements in financial management, namely management controls, budgetary controls, receipt controls, expenditure controls, management of trust funds and deposits as well as management of assets and stores.

“The federal ministries and departments rated as excellent become a role model and this would motivate others to diligently improve and enhance their financial management,” it said.

Europe puts its head in sand over growth crisis

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LONDON | Mon Sep 5, 2011 By Alan Wheatley, Global Economics Correspondent

(Reuters) - Japanization is shorthand for slouching toward that country's noxious mix of low growth and high debt. Euro zone governments will find it tough to keep the ugly new word out of their lexicon.

Concern is mounting over a deterioration in Europe's long-term growth prospects that, unaddressed, will make it even harder to tackle the banking and debt problems underlying the current life-or-death struggle over the euro.

The financial crisis that has been rocking the global economy since 2008 has permanently reduced trend growth across the industrial world. The Organization for Economic Cooperation and Development in Paris reckons the potential output of its 34 member countries has dropped by about 2.5 percent.

"A lot of countries are going to take a permanent hit to their trend rate of growth. This is not an ordinary recession and so we're not going to see countries bouncing back to pre-crisis rates of growth," said Philip Whyte, a senior research fellow at the Center for European Reform, a London think-tank.

As firms have gone bust, capacity has been lost for good. With demand subdued, profitable companies are not replacing old plants.

And as high unemployment persists, skills atrophy. This weakens productivity and shuts people out of the job market for longer and longer periods -- a danger stressed by Federal Reserve Chairman Ben Bernanke at the U.S. central bank's Jackson Hole symposium last month.

Apart from sapping animal spirits and forcing governments to raise taxes or cut spending, diminished growth closes off one route for lowering the high sovereign debt to gross domestic product ratios that have locked Greece, Ireland and Portugal out of the bond markets and are unnerving investors in Italian and Spanish debt.

Against this background, and with the scope for fiscal and monetary stimulus all but exhausted, politicians might be expected to grasp the nettle and push through reforms to improve the supply side of the economy -- policies such as making it easier to hire and fire, promoting greater competition and investing more in training.

Far from it. Pier Carlo Padoan, the OECD's chief economist, says he is less optimistic about the prospects for deep-seated change than he was at the start of the year.



"I see that measures are being announced. I would like to see them being implemented," Padoan said.

With policy ammunition running desperately short, he said it was time for governments to overcome their squeamishness about confronting vested interests opposed to change. "This is a luxury that many countries cannot afford any more. The situation does not allow it."

SOUTHERN DISCOMFORT

The vicious circle of rising debt and falling growth is made worse by the fact that those countries drowning in debt on the periphery of the euro zone are also the ones that have dragged their feet on freeing up their product and labor markets or modernizing their education systems.

"They're going through some truly horrible times. I'm very worried about the whole southern European fringe, not just on an 18-month to 2-year view but looking out a decade or longer," said Whyte with the Center for European Reform.

Germany, by contrast, derided a decade ago as the sick man of Europe, is being held up as a model, at least when it comes to jobs.

"The remarkable resilience of the German labor market in the last few years, where wage moderation and flexible time accounting shielded the economy from excessive job destruction, illustrates admirably the promise of well-structured reforms," Jean-Claude Trichet, president of the European Central Bank, said approvingly in Jackson Hole.

How much are countries missing out by not pressing the reform button?

Padoan says Europe's trend growth has fallen in recent years to an average of just 1.5 percent a year, but he says some members of the 17-nation euro zone could almost double that rate with a supply-side jolt.
Italy needs to liberalize its service sector, open up professions to new entrants and improve energy efficiency, Padoan said. Greece needs to do all that and overhaul its labor market and competition policy at the same time.

POOR ADVERT FOR FREE MARKETS

Germany, too, could grow faster still if it liberalized services, which would trigger increased investment.

These policy prescriptions are well worn. Leaders of the European Union enshrined them and a host of other reform goals in the 2000 Lisbon Agenda, which they promptly ignored. The pledges have since been repackaged as the Europe 2020 Strategy, but Whyte says the havoc wrought by the near-collapse of the international financial system will make politicians more wary than ever of the social disruption that reforms entail.

"The Great Financial Crisis hasn't been a great advert for free-market capitalism," said Whyte. His research outfit publishes a booklet this week exploring how Europe could take off by embracing innovation. But in this area, too, Whyte fears the political climate means policy is likely to be increasingly hijacked by incumbent firms hostile to competition from start-ups.

Europe is not doomed to go down Japan's path of economic stagnation. Its potential growth rate is low but stronger than Japan's -- estimated by the Bank of Japan at just 0.5 percent a year because of a fast-shrinking working-age population.

But the specter of a renewed recession is a reminder for governments that, even if they can spirit away the euro zone's currency and debt woes, they have still to find the elixir for growth.

"I'm not saying politicians will implement reform, but they should," Padoan said. "Some politicians resist reform because they are captive to interest groups. Well, the price for those governments in terms of sustainable growth will be very high."

(Reporting by Alan Wheatley; Editing by Ruth Pitchford)
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