Banks reporting lower default rates on loan repayments

Commercial bank NatWest has recently reported experiencing a lower amount of people defaulting than expected.

NatWest group reported releasing £102 million, which were in reserves ready for bad loans in the first quarter.

These results were apparently better expected as the Bank predicted a much more negative economic outlook.

However, Standard Chartered experienced a cost of $20 million from bad loans during the same period, nevertheless, this is a decrease of $354 million from the previous financial quarter.

Other large banks, such as HSBC and Lloyds have also reported this trend, the BBC reports.

At the start of the COVID pandemic, last year, the majority of large banking firms issued a warning to businesses and individuals who were at risk of being unable to repay their debts.

This increase in risk was due to the rising uncertainty which has come as a result of COVID, most people owe someone debt, wherever that’s a mortgage or loan, and when individuals are faced with high uncertainty, they do not know if they will be able to repay said debt or if they will have to default.

This is because the rising uncertainty means that consumers did not know if they would keep their jobs as businesses did not know if they would see a massive decrease in demand.

So, for these reasons, big banks had to prepare for economic agents to default on payments as the coronavirus ravaged the global economy, NatWest itself experienced £802 million in loan impairment costs in the first quarter of 2020.

HSBC said it had set aside $3 billion in reserve in preparation to cover bad debts last year.

However, the bank reported that it had ‘released’ $400 million of that $3 billion due to the more recent positive economic outlook.

Banks such as Standard Chartered, Lloyds and HSBC have reported seeing lower default rates than expected corresponding to the increasing economic confidence.

This increase in confidence is mainly attributed to the rollout of vaccines as well as the UK Furlough scheme which has ensured that vulnerable individuals are still able to maintain an equitable level of disposable income.

Although those protected by the scheme may not be in the market for buying a house, due to the fact that the majority of Furlough payments are in industries where wages are low, they still will have some outgoing debts, especially in the form of rent.

And, if landlords don’t get their rent repayments, they will likely be unable to cover their own debts, for example, the property they have a mortgage on and renting out.

So, it is essential for the confidence of economic agents to be at an optimal level so that the economy can properly function, without confidence, this chain of debt is broken, and everybody loses.

Despite the increasing confidence, there is a continuing uncertainty lurking as certain individuals may fear another wave of COVID.

Because of this uncertainty, 12,000 mortgage customers and 16,000 people with personal loans are still on repayment holidays with the bank to ensure that they do not have their personal assets seized unfairly by those to who they owe their debts.

But, as the UK economy becomes to recover after its sharp contraction during COVID-19, the economic outlook will begin to look more and more positive. As the UK’s growth forecasts increases increase from 5% to 6.8%, the likelihood is that banks will begin to see optimal default rates on loan repayments in the near future.


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Written by Hubert Kucharski

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