Bad debts rocket for lower-end lenders

CITY fears are intensifying about a further surge in credit defaulters after a series of warning signs from companies exposed to Britain's bulging debt burden.

Companies that trade off society's lowest earners, the so-called sub-prime market, are at particular risk as their borrowers tend to be those who are most likely to fall behind with repayments.

Compass Finance, the niche mortgage broker whose investors include England cricket stars Michael Vaughan and Andrew Flintoff, warned last week that this year's profits would be 'materially below' last year's after worse-than-expected mortgage lending since the end of January.

The alert comes just weeks after Kensington Group, which specialises in lending to contract workers and the self-employed, said its arrears and losses 'have continued to increase', as forewarned, in part due to interest rate rises over the past 18 months.

High Street credit provider Hitachi Capital, whose clients include furniture group DFS and jeweller Mappin & Webb, is finding it tougher to recover money from defaulters than a year ago, reflecting a wider trend of shoppers overstretching themselves with borrowing.

The warning signs coincide with Government figures showing 10,091 people went bankrupt in the first quarter, up 24.5% on a year earlier and the highest number since records began in 1960. An additional 3139 entered individual voluntary arrangements, where debtors put together a payment plan with their creditors.

Numis broker Justin Bates said he has written to clients saying: 'Beware, there will probably be pressure on the credit finance companies over concerns about ability to grow their loan books and also rising bad debts.'

Hitachi Capital chief executive David Anthony noted recently: 'In the last few years we would recover over 30% of the debt written off. Now we are down to 25%.'

Hitachi's borrowers tend to take on credit averaging £1000 per purchase-At present, Anthony insists, the change is a 'consumer finance hiccup', but he admits that the numbers of borrowers who are overstretched is "bigger than before'.

However, such problems could provide opportunities elsewhere. Debt Free Direct, which advises people in financial trouble, saw its average monthly turnover rise to £858,000 in the six months to 30 April from £515,000 the preceding half year. Its workforce has tripled in 18 months to 153.

City analysts reckon new Aim entrant Accuma, another debt advice company, could also be in for a profitable ride.