Consumer borrowing showed further signs of stabilising during May, as the Bank of England warned that the record levels of debt people had taken on could be a threat to the economy.
The British Bankers' Association said mortgage lending during the month was down on the levels reported during May 2004, while the number of new loans approved were three per cent lower than in April and 17 per cent weaker than the previous year's levels.
At the same time credit card borrowing was more subdued than during previous months, and lending through overdrafts and loans was only marginally above the recent average.
But despite the cooling in the rate at which people are taking on debt, the Bank of England said there were signs suggesting credit quality may have fallen, as write-offs of UK household debt by the major banks increased.
In its Financial Stability Review, the Bank said that while the outlook for credit risk remained favourable in the short term, the high levels of indebtedness of households continued to point to medium term vulnerabilities.
It warned that periods of economic strain could also lead to more people having problems keeping up with their debts.
The Bank said the rate at which lenders were writing off consumer debt rose sharply during the second half of 2004, as people were unable to meet repayments on credit cards and loans, and this increase may not have been fully anticipated by the banks.
At the same time there was a 31 per cent surge in the number of people going bankrupt during the past year, which it largely attributed to the high levels of unsecured debt people had taken on.
It said lenders had also expressed concerns that the rise was the result of a reduced commitment among consumers to repaying debt, particularly among young people.
Consumers have taken on record levels of debt in recent years and now collectively owe more than £1 trillion through mortgages, loans, credit cards and other finance agreements.
The Bank said unsecured lending now accounted for more than 90 per cent of banks' write-offs, and several high street lenders, including Barclays, Lloyds TSB and Royal Bank of Scotland, have recently warned they have had to increase their provisions against bad debt. The report said one challenge for banks was keeping track of how much people owed, when consumers often had debts with several different lenders, and it welcomed a deal brokered by the British Bankers' Association, under which banks will share data on consumers' credit card and loan accounts by the end of 2005.
But it warned that lenders' exposures could increase rapidly if people drew down all the credit that was available to them through overdrafts and credit cards.
The BBA said during May credit card debt rose by £117 million, compared with a recent average of £148 million a month.
Lending through loans and overdrafts was slightly stronger, jumping by £723 million, compared with around £597 million a month during the previous six months.
However, mortgage lending also remained subdued, with net lending rising by £4.3 billion during May, down from £4.9 billion in May 2004, and a recent average of £4.5 billion a month.
The group added that the level of mortgage approvals it was seeing suggested lending would remain stable in the near future.