News Article

Sector Analysis

Banks must pass on rescue package if Britain is to avoid a debt trap in 2009

By CreditMan Friday, November 7, 2008

Figures published today by the Insolvency Service show the number of personal insolvencies reached 27,807 in the third quarter of 2008 - an increase of 8.8% on the previous quarter. The figures consisted of 9,746 Individual Voluntary Arrangements (IVAs), an increase of 3.3% on the previous quarter and 17,341 bankruptcies, representing a significant increase of 12.1%.

The number of company liquidations reached 4,001 in the third quarter of 2008 – an increase of 10.5% on the previous quarter. The figures consisted of 1,483 compulsory liquidations, an increase of 10.9% on the previous quarter and 2,518 creditor’s voluntary liquidations (CVL), representing an increase of 10.2%.

Bev Budsworth, managing director of The Debt Advisor and Credit Today’s 2008 ‘Debt Counsellor of the Year’ and ‘Insolvency Practitioner of the Year – Personal’, comments: “It’s hardly surprising that the levels of personal and corporate insolvencies are increasing this year. Banks and other financial institutions are still failing to pass on the benefits of their recent multi-billion pound rescue package to consumers and businesses. Some mortgage providers have even increased their rates to borrowers, despite the record cut to base rate, yesterday. I am therefore calling on the government to ensure that their financial rescue package, which helped keep several banks afloat, is ‘trickled down’ to benefit the people that most need it – small businesses and consumers. If the banks fail to pass on the benefits down the line, I believe we would see potentially devastating increases in personal and corporate insolvencies in 2009 – as much as 30%!”

“I believe the growth in company liquidations is two fold; firstly, due mainly to loss of turnover as the economy declines. We are seeing more cases, especially in the retail and financial services sectors where it is actually impossible to save the business as they have suffered a dramatic decline in income. Secondly, there is a general inability to access credit for businesses. Banks are withdrawing facilities or refusing increases and generally being far more selective about which businesses to help with cash flow finance as demand for credit far outstrips supply.

“I believe that the effects on businesses will steadily worsen as consumer spending continues to dry up and economic pressure tightens. If financial institutions keep failing to pass on the help afforded to them, consumer spending will decline further, taking with it the demand for goods and services.

“If consumers don’t have the money to spend, then more and more business will inevitably fail, damaging the economy still further. As the inevitable recession takes hold, I believe we will see a further rise in corporate insolvencies this year and a further increase of between 20% and 30% throughout 2009.”

Budsworth’s comments come at a time of increasing pessimism across most sectors. High food and energy costs have pushed the level of inflation to a 16-year high of 5.2% – more than double the government’s 2% target. High inflation hits consumers hard and, coupled with banks not passing on significant base rate reductions, keeps many mortgages out of financial reach.

The full effects of the credit crunch are becoming more evident as retail sales are growing at their slowest rate for two and a half years with many major retailers reporting a significant reduction in profits and even some losses. Major sectors, including manufacturing, construction and automotive, have already experienced serious problems, leading to market analysts stating that the financial crisis is finally hitting home and predicting deep recession.

“Personal insolvencies have shown an increase – especially bankruptcies, however; I don’t think these figures tell the whole story. More and more people are choosing informal payment and debt management plans which can be offered by providers who are not qualified insolvency practitioners (IPs). These schemes are favoured by banks and financial institutions but, unfortunately, there are no figures for the amount of these plans.

“It is believed that there were as many as 400,000 people last year who would normally have sorted their debts through debt consolidation. However, due to more stringent lending, they were unable to do so and would have probably turned to debt management plans. I suspect therefore, that if there were statistics, the levels of debt management plans would have shown a significant increase this quarter.

“Bankruptcies remain an issue showing a marked rise this quarter and I predict them to soar in 2009. As people reach their financial ‘tipping point’ and run out of money, they are simply ‘giving up’ and handing back their keys to their property and declare themselves bankrupt. This is only likely to get worse as the recession deepens and more people are financially stretched.

“Creditors need to be supportive of IVAs as a better alternative to bankruptcies, not least for the fact that the average return for an IVA is 34% of the debt, compared with over 80% of all bankruptcies returning nothing to creditors. It’s vital that they stop fee capping arrangements have faith in the IVA process in order to turn ‘won’t pay, can’t pay’ debtors into ‘will pay, can pay’ ones.

“I don’t believe that we have seen the full effects of the credit crunch, even as we enter a recession. Higher living costs and tighter credit will increase the demand for more formal debt management schemes. This, coupled with recent work by the IVA Forum to agree a voluntary code for SCIVAs (Simple Consumer Individual Voluntary Arrangements), should increase creditor confidence, making IVAs more readily available and increasing approval rates.

“Mortgage lenders must pass on the government’s help to consumers. At a time when the Bank of England base rate is at it lowest point since 1955, consumers coming to the end of their current mortgage term can still expect to be hit by an increase of £200 - £300 a month in their mortgage payment. This is a situation that will only get worse if lenders withdraw products or follow Abbey’s lead of increasing interest rates on some of its mortgages last week by 0.5%.

“I predict that figures for the final quarter of 2008 will show an increase in personal insolvencies – especially bankruptcies and next year, we could see a rise in excess of 10% in total.”

According to figures published by Credit Action, total UK personal debt now stands at nearly £1.5 trillion and is growing by £207 million each day, or £125,000 a minute.

An average UK household now owes £22,190 on some form of unsecured loan and nearly £60,000 when their mortgage is factored in. The average UK adult now owes over £30,000 (inclusive of mortgage).

Budsworth concludes: “The government needs to increase the pressure on banks and financial institutions to pass on the benefits of the multi-billion pound rescue scheme down the line to consumers and small businesses. The banks need to play their part and so do we. This is the time for the debt management industry to respond to the market, helping people with serious financial difficulties to get back onto their financial feet again.”