David Prosser: Bad debts are the result of bad banking

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The Independent Online

So the cost of borrowing is rising for the first time in two years. The Bank of England's Monetary Policy Committee announced on Thursday that it would raise base rates from 4.5 to 4.75 per cent. Leading mortgage lenders have already signalled that they will pass the increase on to customers. A borrower with a £150,000 mortgage, say, will now pay an extra £30 a month.

A rise in the number of people struggling to meet debt repayments is bound to follow. There are already signs that the hangover from Britain's borrowing boom is worsening: announcing half-year results this week, HSBC, Lloyds and Barclays all revealed sharp increases in their provisions for bad debt.

Naturally, the banks blame everyone but themselves for this problem. Lloyds, for example, is scathing about the firms that sell individual voluntary arrangements (IVAs), a type of insolvency that enables borrowers to agree repayment plans with lenders.

The growth of IVAs and the relaxation of some of the punitive measures imposed on full-blown bankrupts, Lloyds suggests, have encouraged borrowers to take on too much debt, in the knowledge that there will be an easy way out later.

The argument just does not stack up. Even leaving aside the question of whether bankruptcy and IVAs are an easy option - debt advisers and consumer groups say they absolutely are not - surely it's up to the banks to be a bit more careful with their money?

Faced with the realisation that it has lent too much money to customers who now can't pay it back - Lloyds's bad debt provision in the UK has risen to a whacking £632m - the bank says someone else is at fault, as if working out who you can safely lend money to is not a basic skill in banking.

Not that repayment defaults have sent Lloyds into crisis; it still made a first-half profit of £1.78bn. The figures at Barclays and HSBC were, respectively, £3.6bn and £6.7bn.

And that's the rub. As long as our banks go on making such huge profits, they don't have to worry too much about even large bad debts. They have no reason to be more responsible in their lending decisions, particularly when there are other people to blame when the victims come to light.

Meanwhile, if you're concerned about rising interest rates, take action. Most economists think this month's rise will be a one-off for this year at least. But there is a minority view that rates could increase further.

If higher rates would leave you struggling to repay your mortgage, it's worth fixing what you pay now. The cheapest fixed rates are currently slightly more expensive than the best variable deals, but that's a small price for the certainty your repayments will remain affordable.

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