Banks cutting back on lending

The credit crunch has taken its toll in more or less every sector of the financial market over recent months, and the financial turmoil has resulted in a number of changes in the way that many lenders operate.

Inter-bank lending has become increasingly difficult to obtain and expensive to secure for lenders, and this means that the provision of funding is more limited, which in turn means that lenders have had to tighten their lending practices.

According to the Bank of England lending levels started to dwindle during the last few months of 2007, with the credit crunch having swept across the country in the late summer months.

Many consumers and businesses that would have normally found it fairly east to get credit found that they were now left out in the cold.

Those who would have faced some difficulties getting credit in the past quickly found more or less every door closed in their faced when it came to getting finance.

Despite high hopes the bad news is that many are expecting the credit crunch and financial turmoil to continue, at least for now. This has resulted in credit conditions getting tighter, and the fact that lenders are less willing to dole out credit has had a knock on effect on consumer spending, thus affecting the economy as well as affecting consumer confidence.

This is made worse by the fact that consumers are facing higher living costs such as increased petrol prices, higher mortgage repayments, higher energy costs, and rising food costs.

One leading economist recently stated: ‘The Bank of England credit conditions survey for the fourth quarter indicated that lending to households had tightened and become more expensive.

Furthermore, the availability of credit for households was expected to diminish further over the first quarter of 2008, which will add to the growing downward pressures on consumer spending.’

Consumers have been finding it increasingly difficult to get all types of credit, from mortgages and home loans to unsecured loans and credit cards. But it is not just consumers that are suffering.

A recent report indicated that over 50% of lenders said that credit facilities to businesses had decreased significantly, and over 35% expected the situation to get worse during the first few months of this year.

The commercial division of Nationwide recently decided to halt lending to new customers as well as deciding not to take on new broker referrals, deciding instead to concentrate on existing borrowers.

An official from the commercial division of the building society said: “I am using market conditions to be very selective about the type of lending we do.

There is an enormous appetite out there for borrowing, half of my competitors have disappeared and a lot of people are looking for finance.” He also said: “We want meaningful relationships with customers and because of this we feel this is the time to stand by our existing customers rather than take on new customers.”

Another buy to let lender, Paragon, also recently said that it would have to cut back on lending to new customers, and would need to focus on existing customers at least until the money markets loosened up.

In the meantime recent months have seen the level of credit card rejections rise, the level of approved mortgages fall, and there have been many different indicators of tightening credit conditions facing both consumers and businesses across the UK.

With interest rates due to come down over the coming months many homeowner may be flocking to try and refinance their mortgages, but this may prove more difficult than they imagine, as a result of the current financial climate.

It is thought that some lenders will now be focusing on consumers with very good credit histories in order to keep the credit markets afloat, which means that many lenders may be flocking to lend to those with no debt, some savings put aside, and no repayment problems with bills and past debts.

However, when it comes to those with damaged credit – which is a group that has been rising in size over recent years – lenders will most likely be steering clear.

A number of lenders have taken some of their unsecured loans off the market altogether simply because they cannot afford to take the risk of defaults when the finance is not secured against anything that therefore they have no way of recouping the loss.

Of course, there are still loans and credit available but these days it is likely to be a far longer, harder process to get affordable finance as the credit boom comes to an end.