Consumer loans in the European banking sector have shown significant increase standards in most countries in recent years. In September 2021, the amount of consumer credit from EU banks surpassed the previous number by 32%. This statistic has also exceeded overall loan growth of about + 17% over the same period of the last five years.
Many financial experts explain this steady growth in consumer loans by the strong demands of the consumers due to beneficial macroeconomic conditions with a decrease in unemployment, as well as an increase in disposable income, supported by consumer confidence. On the supply side, banks tend to lend unsecured loans for profitability and higher margins, in a low-interest-rate environment.
Despite stimulating growth, consumer loans still serve only a small part of the total loan portfolio of European banks. In the last year, consumer loans represented 7.6% of total loans at amortized costs. However, the analysts at a Swedish company smslansnabb.se, are reporting an increase in consumer lending as a percentage of total lending, which ranges from 18% to 28%.
Consumer loans also tend to show above-average reduction rates as opposed to other segments. In the past quarter, 6.5% of consumer loans issued by European banks were in arrears, while the average rate on non-performing loans in the EU was only 3.4%. In an environment of persistent low/negative interest rates, failing macroeconomic predictions, and delaying profitability, banks may tend to increase their vulnerability to products with higher margins and lower credit standards. That is why the supervisors are encouraged to closely monitor developments in consumer loans in order to identify in a timely manner potential areas of risk related to this segment.
The European Banking Authority also strives to improve bank lending standards and lending practices, including the evaluation of borrower creditworthiness, in lending and monitoring guidelines, which address, among other information, specific conditions for credit evaluation and consumer loans.
What to expect in the future?
Despite significant growth in recent years, the share of consumer loans in the total volume of loans has not changed significantly. The share of consumer loans in the total volume of loans and receivables at amortized cost from September 2015 to September 2020 only increased by 30 basis points. (5.3% to 5.7%). During the same period, consumer loans increased as a share of total loans to households, from 17.4% in September 2015 to 18.4% in September 2020.
This year, the risk of consumer loans as a percentage of all loans was low compared to other segments: less than 8% of the total volume of loans and advances was in consumer loans. However, there is a large gap between consumer loans and the total volume of loans credit, since, in some countries, more than 19% of total loans are allocated to consumer loans. At the same time, data provided by Smslansnabb shows that banks are aggressively lending to consumers, and consumer lending is growing faster than any other segment of credit. In addition, it should be noted that consumer loans are widely provided not only by banks but also by non-bank financial corporations. While non-bank financial corporations are subject to a prudential supervision regime equivalent to that of banks in most jurisdictions, in some cases, they are subject to a different and often less strict supervisory regime. Supervisors should take into account the sensitivity of consumer loan risks to economic cycles, given the apathy of the European economy. It parallels the growing appetite of banks to increase their exposure to consumer loans, despite their inherent riskiness.
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