Datamoniter says that despite the non-standard population being at is lowest level in recorded history, financial exclusion is still a problem for one in four adults of working age in the UK.
Datamonitor estimates that 9.4m people of working age in the UK would have been systematically refused credit by mainstream lenders in 2003. This is down by 600,000 people on 1999 levels.
But despite progress, one in four UK adults of working age still struggle to borrow from mainstream UK lenders.
The most significant reasons why individuals are rejected by mainstream lenders are being self-employed or unemployed, having a county court judgments record or a history of mortgage problems, not having even a basic bank account and being an undischarged bankrupt.
Edward Ripley, financial services analyst at Datamonitor, says: “These figures show that impeded access to credit is a problem for a very significant proportion of the UK's population.
“Without access to affordable credit individuals are forced into saving for all purchases. Some would advocate such an attitude for everyone, but for many purchases it is simply not practical to save. While credit cards and overdrafts should never be thought of as an essential long-term funding tool, mortgages and personal loans facilitating, for example, home improvement or a new car are rightly seen by most people as a necessity for everyday living.”
Fewer people have a checkered credit history than ever before and the Bank of England base rate plays a pivotal role in driving the non-standard population because it has a major impact on the rate of interest charged by lenders, and therefore, effects the affordability of borrowing commitments. Undoubtedly helped by the low base rate environment, mortgage arrears, repossessions and county court judgments continued to decline in 2003.
Mortgage lenders repossessed 7,630 homes and 93,050 mortgages were in arrears. This compares to a total of 11,970 homes repossessed and 117,070 mortgages in arrears in 2002. Furthermore, there were just 626,787 CCJs registered to consumers in 2003. This was 264,000 less than in 1999 and well below its 1991 peak of almost 1.8m.
Datamonitor defines a non-standard individual as someone who is systematically refused credit from mainstream lenders – banks, building societies and large finance houses. Datamonitor's definition of non-standard therefore includes people commonly classified as sub-prime, non-status, non-conforming and credit impaired.
Much has happened over recent years to bring the non-standard lending market into the realms of respectability, and a number of specialist lending markets have sprung up to service these individuals – individuals who would otherwise have to resort to savings for all purchases or go to unregulated loan sharks to meet their borrowing requirements.
However, the number of personal insolvency cases has increased since 1999 despite strong economic conditions. This trend culminated in a particularly bad year in 2003, when the number of bankruptcies jumped to 28,021 from 24,292 in 2002, an annual increase of 15%.
Furthermore, changes to the UK's insolvency laws that came into force on the April 1 and which allow bankrupts who have failed through no fault of their own to be discharged within a year rather than three years, are tipped to substantially increase the number of people filing for bankruptcy in the future.
Ripley adds: “A high bankruptcy rate may be healthy for society if it provides honest debtors caught in a downward credit spiral with a fresh start.
“However, it could also cause great detriment to consumer credit providers if it creates incentives for dishonest debtors to rack up debt that they have no intention of ever repaying. Indeed, lenders are right to worry about potential increases in personal insolvency cases resulting from the new regulations.
“However, the relatively small number of existing bankrupts indicates that even a substantial jump in the number of applications is unlikely to bring this problem to mammoth proportions.”
The non-standard mortgage market has performed exceptionally well over the past five years, even outperforming the mainstream sector. Non-standard mortgage gross advances grew by26% in 2003 to reach £31.6bn, compared to 22% in the mainstream market.
However, the penetration of mortgages within the non-standard population remains considerably lower than within the population as a whole. Datamonitor estimates that at the end of 2003, just under 29% of non-standard households owned their property with a mortgage compared to 48.5% of mainstream households.
Non-standard lenders have benefit from the positive conditions driving the mainstream mortgage market, such as soaring house prices and low base rates, as well as from the popularity of products like self-certification mortgages, non-standard buy-to-let mortgages and non-standard remortgaging. In addition, an influx of high profiled mortgage lenders into the market in recent years has driven rates down to levels more in line with those on offer in the mainstream market.
Datamonitor estimates that at the end of 2003 balances outstanding in the home collected credit market amounted to £2bn, up from £1.5bn in 1999. However, contrary to the trends experienced in other markets, after a couple of years of relatively strong growth the home collected credit market remained flat in 2003. Balances outstanding increased byjust £6m while gross advances actually declined by £36m.
Recent strong economic conditions have clearly taken their toll on the market. Some people have switched to mainstream providers as their financial situation improved, while others are simply borrowing less frequently from their existing home collected credit providers.
However, demand-side factors do not fully explain the market's recent change in fortunes. Over the past couple of years, home collected credit providers have tried to combat falling demand within their existing customer bases by signing up new accounts.
However, because new customers are inherently more risky than existing customers, this strategy has resulted in higher levels of bad debts. In 2003, Datamoniter has seen a big u-turn in providers' strategies, with many abandoning their troubled attempts to grow their home collected credit business and switching their attention to other markets where the incidence of bad debt is less severe. This includes unsecured personal loans to customers paying by direct debit, secured personal loan and car finance.