Banks call for data-sharing on personal credit histories

Stories of customers with wallets stuffed full of credit cards, stacked up with more debt than their holders can afford to repay, have become commonplace amid the outcry about the level of personal indebtedness in Britain.

Now, for the first time in recent years, the banking industry appears to be showing signs that the strain on consumers' pockets is feeding through to them in the form of rising provisions for bad debts.

In a desperate attempt to head off criticism that they have been too ready to grant loans, the banks have begun calling on each other to share data about customers' credit history - good or bad - to spot those who might be running into trouble.

Last week, Barclaycard provided the clearest illustration of the situation. Its provisions against bad debts for the first six months of 2005 rose 42% to £508m - helping to knock 17% off the bank's profits, which came in at £379m. The country's largest credit card company is also cutting credit limits and turning away one in two applicants in an effort to avoid further problems.

HSBC also helped to set the tone after describing Britain as the "most difficult credit market" in any of the 77 countries in which it does business.

The question now being asked by banking analysts and insolvency experts is whether the trend of bad debt will continue into the second half of the year.

Michael Lever, a banking analyst at CSFB who warned about rising bad debt levels at the start of the companies reporting season, said: "People who see the uptick in consumer provisions as not continuing are deluding themselves."

Analysts are taking comfort, however, from the fact that the problems are largely in credit cards and unsecured loans rather than mortgages. Card payments tend to be the first that customers miss when they run into trouble. But if unemployment were to start rising rapidly or small businesses began having difficulties, this sanguine approach to bad debts would probably change.

Simon Maughan, an analyst at Dresdner Kleinwort Wasserstein, said: "It's a question of affordability. It's not about unemployment."

While the banks' bad debt provisions, now known as impairment charges, are rising, so are the number of people becoming insolvent.

There is some suggestion this is because it has become easier for people to declare themselves bankrupt, but most experts believe that is only part of the picture.

Pat Boyden, a partner in the business recovery services practice at PricewaterhouseCoopers, notes that bankruptcy figures tend to be a lagging indicator, reflecting debts taken on 18 months ago.

His research also appears to contradict any suggestion that changes in circumstances, such as divorce or unemployment, caused the rise. He analysed 500 voluntary arrangements in July and found 372 people gave expenditure in excess of income as a response, while 58 cited marital break-up and 52 unemployment.

Many bankers think last week's quarter-point cut in interest rates last week to 4.5% will ease the debt burden. But Mike Gerrard, a personal insolvency expert at Grant Thornton, wonders if it might be a double-edged sword. "While it will help people with mortgages, will it actually encourage people to take on more debt?"