Exposure of European banks to consumer loans has increased significantly over the past four years by about 14%, outpacing overall credit growth over the same period of +10%.
During this time, the increase of consumer loans was extensively separated among European countries. On average, consumer loans grew by 5% per year, and in the first three semesters of 2019, they grew by 6.9% (total loans grew by 4.8% over the same period ). This growth can be connected with strong borrower interest due to enhancing macroeconomic conditions witnessed in recent years in several countries.
The quarterly growth rate of consumer loans has been consistently higher than that of other loans to the population, such as mortgage loans. In addition, the data provided by a Swedish company smslansnabb.se, states that consumer loans are said to have increased by around 23% since March 2018, well ahead of all other credit segments.
In September 2020, banks in France, Spain, and the United Kingdom reported 87% of Resources credits.
From the growth of consumer loans in the European Union over the past four years, seven has been mainly driven by France and Spain, which have the highest volumes of consumer loans and also recorded strong growth during this period. Spanish banks increased their positions by more than 27%, while French banks increased their positions by around 32%.
Risks associated with consumer loans
A bank that applies a relatively large portion of its portfolio to consumer credit typically has a comparatively high net interest margin. In other words, the share of consumer loans in total loans is more closely related to the net interest margin than other credit segments. A similar conclusion can be drawn concerning return on investment, as it is also positively affected by an expansion in consumer lending. It may be partly due to a causal effect, as the CEE countries that have higher interest rates than other jurisdictions have also increased the share of assets in consumer loans. However, consumer loan measures have always been attractive to banks as they were significantly more high-priced than any other segment of credit.
Another data from the analysts of Swedish Smslansnabb indicates that the average span of consumer loans fluctuates from country to country but is in part determined by the purpose of the loan. In this regard, the accountable analysts assume that the average maturity is between 3 and 7.5 years. Some countries, such as the Czech Republic, Hungary, Italy, the Netherlands, Portugal, and Slovenia, have reported a trend towards longer deadlines for news offered consumer loans. In addition, in some countries, banks offer consumer loans for up to 10 years. A similar growth trend, more apparent in Eastern Europe, is observed for the average amount of new consumer credit. The average consumer loan amount varies considerably from country to country.
To address these growing risks and ensure adequate consumer protection, EBA is increasing the consumer security aspect in its lending and monitoring guidelines.
In particular, the new guidelines set out the requirements for businesses’ credit management systems for the improvement and application of standards for granting loans and for assessing the creditworthiness of borrowers. This method is achieved by establishing consumer credit requirements. Several European countries, including Sweden, have taken various measures to restrain the growth in consumer loans. These measures incorporate restrictions on debt service, income ratios and consumer loan maturity, interest rate caps to protect consumers, and references for a moderate credit rating.