High street banks are preparing to write off an unprecedented £6.6 billion as Britons default on a record amount of personal loans and credit card debt.

Rising interest rates and higher Council Tax and utility bills are taking their toll. Struggling borrowers who could previously find a fresh source of credit to tide them over are finding supplies cut off as banks tighten their lending criteria.

Lloyds TSB yesterday revealed that its personal customers in Britain defaulted on £1.24 billion in 2006, including £740 million of personal loans and £490 million of credit-card debt.

The write-offs were up by 16 per cent on 2005 and would continue to rise this year, Lloyds predicted, though at a much slower pace.

Earlier this week, Barclays wrote off a record £1.7 billion because of bad debts in its UK retail division and in its Barclaycard operation in 2006, up by 36 per cent on 2005.

HBOS, Royal Bank of Scotland and HSBC are expected to announce write-offs of £1.24 billion, £1.35 billion and £943 million respectively in the coming weeks because of defaulting customers.

Analysts at Citigroup, the American bank, estimate that total write-offs because of defaulting personal customers in Britain will be £6.6 billion for 2006, rising to £7.2 billion in 2007.

The banks have only a limited ability to recoup money from overindebted unsecured borrowers. Most of those struggling have few if any assets. The loans are unsecured, so the banks have no easy claim on their customers’ homes.

Sue Edwards, senior social policy officer for Citizens Advice, said: “This vindicates what we’ve been saying for years. There is a crisis of personal overindebtedness.”

She said that the banks were partly to blame, pointing to a flood of loan offers, and cited extreme cases where customers were encouraged to borrow so much that their entire monthly income was less than the repayment bill.

The problem imposed a heavy burden not just on individuals and their families, but society and taxpayers in general, Ms Edwards said. A quarter of people taking debt problems to Citizens Advice had already visited their GP seeking treatment for stress, anxiety and depression. More than 1.4 million people contacted Citizens Advice last year with debt problems.

Eric Daniels, Lloyds’ chief executive, brushed aside concerns about the mushrooming debts, saying that the money written off was just 1.18 per cent of average lending.

“It’s not in our interests to lend money to people who can’t repay it,” he said.

He declined to accept that the banking industry had been responsible for reckless lending, though every bank has tightened up its unsecured lending criteria in the past two years.

The banks argue that relaxed bankruptcy rules and the aggressive marketing of Individual Voluntary Arrangements have encouraged more borrowers to walk away from their debts. IVAs are pacts agreed betweeen lender and borrower where a portion of the debt is written off and the rest repaid under a five-year agreement.

Personal insolvency levels rocketed to a record 107,000 cases last year. The Financial Services Authority said last month that Britain’s huge personal debt levels — now more than £1.3 trillion including mortgages — were one of the biggest risks to financial stability.

It added that, although most people were managing, a rise in unemployment or interest rates could tip many households into real difficulty.

Up to 2 million households are estimated to be “permanently indebted” — able to meet minimum interest payments but with no real prospect of ever paying off their debts. Total unsecured borrowing by households in Britain has doubled to £212 billion in the past nine years.

Pretax profits at Lloyds, Britain’s fifth biggest bank, were up by 11 per cent to £4.25 billion. “We’re really firing on all cylinders,” Mr Daniels said.

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