The financial crisis of 2007-8 had a huge and dramatic impact on small businesses and consumers across the world – but could we be heading for another credit crunch?
Many market watchers and commentators think so. They are worried about a series of key financial indicators that could spell trouble for markets, beginning, this time, in the UK.
Earlier this week, the Bank of England published new guidance on consumer credit. They want lenders to more carefully consider when they offer loans, whether unsecured or vehicle finance, and to also rethink some of their 0 per cent credit card deals.
The Bank is concerned about the consumer credit market. Lending in that sector is growing by 10.3 per cent a year, compared with a rise of just 2.3 per cent in household incomes. They believe that consumer lending is at the bubble stage, and the repercussions could be severe should it burst.
Last week, meanwhile, the Bank of England published new rules regarding the amount of capital banks must set aside consumer lending defaults. Consumer lenders will now be required to earmark at least a further £11.4 billion to safeguard against the risk of bad personal debts.
Commentators are particularly worried about the growth in 0 per cent finance. It is thought that the average term for these sorts of credit card deals has now doubled to 30 months, prompting concern about borrowers’ ability to service their debts when the deal expires or, crucially, when interest rates eventually rise.
Nobody is yet quite sure what these figures mean, but there is a growing sense of panic about the spread of so-called ‘sub prime’ lending, or loans extended to borrowers with a high risk of default.
There has been a boom in the market for credit cards aimed at people with poor credit histories, and some reports suggest that consumers in this bracket could often be spending as much as 30 per cent of their income on servicing these debts.
These are the same concerns that eventually came true in the sub-prime crisis that triggered the 2008 global recession. Then, poor quality debt was found to be endemic in consumer lending, especially in mortgages.
In the States, this led not only to repossessions, but also to the collapse or near-collapse of a number of banks, including Lehman Brothers, which triggered a global crisis.
It is crucially important that small businesses prepare for a broad tightening of consumer purse strings. Even if a crisis does not materialise, it is now expected that the Bank of England’s base rate will rise at some point next year.
The rate has been at a record low since the onset of the last crisis, but there is now widespread concern about consumers’ and business’ ability to make their repayments when it creeps back up.
Businesses that carry debt may wish to consider attempting, where possible, to pay it down more quickly in order to minimise the shock of a rate rise.
However, reduced consumer spending is less easy to plan for. B2C firms should think about ways in which they can reduce spending in order to maintain margin even if they are forced to cut prices in order to remain competitive in what promises to be an increasingly challenging economic environment.
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