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Most of this is fairly incorrect. The risks involved lending money to poor people are largely unchanged by this and the bottom lines of all of the businesses in

Most of this is fairly incorrect. The risks involved lending money to poor people are largely unchanged by this and the bottom lines of all of the businesses involved are essentially unchanged. All of these outstanding amounts are delinquent as the people being relieved of these debts have to have been in financial trouble for at least 12 months by the conditions set out in the program. This means that all of these debts were long-since written off, the risks of these losses already worked into the lending rates and credit qualification cutoffs. It is actually, by most accounting standards, kinda "free".

swatow 12y ago
The economic gain of writing off this kind of debt has to be balanced against the moral hazard effect on future borrowers. Also, it's not clear that you are correct that this debt was largely written off. Certainly the banks didn't expect 100% recovery, but perhaps they expected a nontrivial amount. I'm not an expert in these tradeoffs, but the one economist interviewed in the article said: I am not sure that this is the best way to help low-income people. If lenders think this can happen again they will charge very high interest rates to low-income borrowers
- JamisonM 12y ago
  The debts have to be over a year old, by any reasonable banking standards (even unreasonable ones) those are NPAs, by any accounting standard they are deemed receivables that will not be recovered. They've been written off. This is why I contend that Mr. Baker's statements are likely incorrect. The fact that these receivables/debt would be written off is essentially written into the law. Most here also do not note that the balances here are also, by design, small as well. One can argue that there might be some fear that next time the income requirements will be higher, the debt threshold increased, to make a future forgiveness a problem for companies that carry these assets. I accept that this has some merit but I think most overstate it. (Offsetting this risk in large part is the fact that Croatia has joined the EU recently, foreign banks and companies will have recourse should such a thing happen in future and if such a measure were to hurt them no doubt they would use it.)
  - swatow 12y ago
    Where are you getting your claims about the recovery rate on these debts? >Most here also do not note that the balances here are also, by design, small as well. Can you explain how you think that relates to this discussion? If the debt is small, wouldn't that imply that the person was more likely to pay it off, at least in part?
    - JamisonM 12y ago
      My claims on recovery rates of debt are based on my experience in the banking industry. There are many public sources of information on this topic that you can refer to with respect to expected recovery rates of debts based on age. Provisions for these loses are written into regulations (national and international ones like Basel II/III). Small overdue amounts are very expensive to recover, if a letter costs you $1 and a phone call $1.50 you don't need very many contact attempts to make an overdue loan of $80 worth less than the cost to recover it, you certainly can not afford to send a lawyer after someone. (Again, this is from my experience related to debt collection work.)
      - swatow 12y ago
        Ok you're probably right on the cost of the writeoff, and now I see your point on the size of the debts I agree with that too. Given this, the program isn't really that unique. For example, the US has a program to help out people with high mortgage debt or underwater mortgages.
vidarh 12y ago
In the UK, most of these people - if they were unable to have the debt outright written off because they were missold (if the banks lent them money without a reasonable belief they were affordable for the recipient at the time they were issued) - would almost certainly have been able to get an IVA (Individual Voluntary Arrangement) which would in effect see massive writeoffs as well (you have to set out a strict budget, and then apportion the remainder of your income to service a portion of the debt for 12 months, after which the rest is wiped out - this is basically mostly a hurdle to avoid having people speculate in it). As a result most banks here will fall over themselves to be flexible about repayment arrangements if people just call them to discuss matters. Getting interest rates frozen and payment amounts reduced is fairly normal, as it's way preferable to them to an IVA. Yes, as you say: it's worked into the rates and credit qualification cutoffs, and the UK isn't exactly a hard place to get credit despite these very flexible mechanisms for people to get out of debt. Here's the other thing: These mechanisms are as flexible as they are because the banks have a duty to not give credit to people who can't afford it. If a large number of people go for IVAs, then the banks are probably failing their in their duty even if it is hard to prove individual cases. So it serves as a safety valve to ensure the banks have an ever stronger reason to not make it easier for people to get themselves into trouble in the first place.

swatow 12y ago

The economic gain of writing off this kind of debt has to be balanced against the moral hazard effect on future borrowers. Also, it's not clear that you are correct that this debt was largely written off. Certainly the banks didn't expect 100% recovery, but perhaps they expected a nontrivial amount. I'm not an expert in these tradeoffs, but the one economist interviewed in the article said: I am not sure that this is the best way to help low-income people. If lenders think this can happen again they will charge very high interest rates to low-income borrowers

JamisonM 12y ago
The debts have to be over a year old, by any reasonable banking standards (even unreasonable ones) those are NPAs, by any accounting standard they are deemed receivables that will not be recovered. They've been written off. This is why I contend that Mr. Baker's statements are likely incorrect. The fact that these receivables/debt would be written off is essentially written into the law. Most here also do not note that the balances here are also, by design, small as well. One can argue that there might be some fear that next time the income requirements will be higher, the debt threshold increased, to make a future forgiveness a problem for companies that carry these assets. I accept that this has some merit but I think most overstate it. (Offsetting this risk in large part is the fact that Croatia has joined the EU recently, foreign banks and companies will have recourse should such a thing happen in future and if such a measure were to hurt them no doubt they would use it.)
- swatow 12y ago
  Where are you getting your claims about the recovery rate on these debts? >Most here also do not note that the balances here are also, by design, small as well. Can you explain how you think that relates to this discussion? If the debt is small, wouldn't that imply that the person was more likely to pay it off, at least in part?
  - JamisonM 12y ago
    My claims on recovery rates of debt are based on my experience in the banking industry. There are many public sources of information on this topic that you can refer to with respect to expected recovery rates of debts based on age. Provisions for these loses are written into regulations (national and international ones like Basel II/III). Small overdue amounts are very expensive to recover, if a letter costs you $1 and a phone call $1.50 you don't need very many contact attempts to make an overdue loan of $80 worth less than the cost to recover it, you certainly can not afford to send a lawyer after someone. (Again, this is from my experience related to debt collection work.)
    - swatow 12y ago
      Ok you're probably right on the cost of the writeoff, and now I see your point on the size of the debts I agree with that too. Given this, the program isn't really that unique. For example, the US has a program to help out people with high mortgage debt or underwater mortgages.

vidarh 12y ago

In the UK, most of these people - if they were unable to have the debt outright written off because they were missold (if the banks lent them money without a reasonable belief they were affordable for the recipient at the time they were issued) - would almost certainly have been able to get an IVA (Individual Voluntary Arrangement) which would in effect see massive writeoffs as well (you have to set out a strict budget, and then apportion the remainder of your income to service a portion of the debt for 12 months, after which the rest is wiped out - this is basically mostly a hurdle to avoid having people speculate in it). As a result most banks here will fall over themselves to be flexible about repayment arrangements if people just call them to discuss matters. Getting interest rates frozen and payment amounts reduced is fairly normal, as it's way preferable to them to an IVA. Yes, as you say: it's worked into the rates and credit qualification cutoffs, and the UK isn't exactly a hard place to get credit despite these very flexible mechanisms for people to get out of debt. Here's the other thing: These mechanisms are as flexible as they are because the banks have a duty to not give credit to people who can't afford it. If a large number of people go for IVAs, then the banks are probably failing their in their duty even if it is hard to prove individual cases. So it serves as a safety valve to ensure the banks have an ever stronger reason to not make it easier for people to get themselves into trouble in the first place.