INSIGHT-Britons spurned by banks caught in a coronavirus credit crunch

* Subprime credit providers have reined in lending

* Loan options for low-income borrowers in free fall

* Government plans for 'no-interest' loans not yet launched

By Sinead Cruise and Iain Withers

LONDON, May 21 (Reuters) - When a payroll glitch left
Natalie Gallagher so short of cash this month she couldn't
afford her bus fare to work, she turned to her usual lender
Amigo for an emergency top-up loan.

But she was out of luck. Like many of the lenders that
thousands of higher-risk borrowers in Britain depend on, Amigo
had tightened its criteria for handing out cash in the wake of
the coronavirus.

"They approved my top-up but 10 minutes later I got a text
saying my reason for the top-up isn't one they were doing right
now," she said. "Amigo was my only real option."

While mainstream banks have been obliged to give customers
payment holidays on mortgages and discounted three-month
overdrafts, less support has been offered to so-called subprime
borrowers who often need extra cash just to stay afloat.

Some lenders have closed their doors to new customers while
others have been unable to extend cash lifelines to borrowers
since lockdown restrictions banned weekly visits by doorstep
lending agents to their homes.

According to the Money Advice Service, about 17 million
people in Britain have less than 100 pounds ($122) in savings to
dip into when a crisis strikes and those working in some of the
sectors worst hit by the pandemic are particularly vulnerable.

More than 6 million workers in the retail, travel,
hospitality and beauty sectors are 25% more likely than people
in other industries to have no money to fall back on, the Centre
for Social Justice think-tank said last month.

"The bottom line is that there's nowhere for these people to
go," Roger Gewolb, founder of loan comparison site FairMoney
said. "The consumer lending market has come to a standstill."

Gallagher, 29, from Manchester in northern England, said
while past debts with payday lenders such as Wonga had damaged
her credit rating, she was surprised to be rejected this month.

"I'd understand if I wanted a new loan or had missed
payments but I have never missed a payment," said Gallagher, who
works with offenders.

A spokesman for Amigo said Gallagher's request was declined
because the purpose of the loan wasn't covered in its current
lending criteria, which have been tightened since the pandemic.

"An Amigo loan is intended for considered purchases, rather
than day-to-day expenses; this is why the minimum loan we offer
is 1,000 pounds ($1,225)."

SHORT OF OPTIONS

While some low-income borrowers just struggle to budget,
others have been blacklisted by the mainstream financial system
and rely on alternative credit providers such as guarantor or
doorstep lenders to make ends meet.

Credit score provider ClearScore, which shows consumers what
deals are available based on their circumstances, said subprime
borrowers could on average access only 0.17 of loans in a
snapshot of the market on May 16. On Jan. 1, the average was 1.

On the same date in May, prime borrowers on average found
1.79 loans available, while those in the middle, or non-prime
borrowers, found 0.81 products on average.

Britain's largest subprime lender, Provident Financial Group
, has tightened its underwriting criteria while rival
Non-Standard Finance is now only lending to key workers
such as doctors, nurses, supermarket staff and delivery drivers.

The subprime credit market had already shrunk in recent
years after tighter regulation and interest rate caps pushed a
slew of payday lenders out of business.

Without financial safety nets and affordable access to
credit, millions of hard-up Britons have sought government
welfare payments, with 2.5 million applications for Universal
Credit benefits between March 16 and May 5.

Almost 11 million people have missed or expect to miss a
bill that could result in bailiff enforcement and even eviction,
research from the Citizens Advice Bureau shows.

Debt charities say the absence of government schemes to help
indebted Britons at a time when subprime lenders are pulling
back from the market has been keenly felt.

"High-cost short-term credit may seem to offer a short-term
financial stopgap but too often it can become an expensive
repeat trap," said Sue Anderson at debt charity StepChange.

"It is unlikely to represent a sustainable solution to
people's financial pressures, whereas a well-designed
no-interest loan scheme could potentially make a helpful
contribution," she said.

Plans to offer interest-free loans to some struggling
borrowers - a policy proposed by former finance minister Philip
Hammond in 2018 – have yet to come to fruition.

A Treasury spokesman said it remained committed to working
with stakeholders with a view to piloting a scheme to support
the most vulnerable and sustainable over the longer term.

Lenders are prohibited from selling credit to anyone they
don't think can pay it back, which is likely to exclude many
people who have lost their jobs so far in the pandemic.

That means those employed in industries hit badly, or those
who have seen their household income cut whilst on furlough, are
finding a dwindling range of options among subprime lenders.

"I would imagine 35% of the population are now in this
non-prime or subprime position and there's more coming,"
FairMoney's Gewolb said. "All they can do is find a guarantor or
have a conversation with a guy down the boozer who has friends
with baseball bats and no consumer credit licence."

SUBPRIME SHUTOUT

The England Illegal Money Lending Team, which investigates
and prosecutes loan sharks, said it was launching a live website
chat on May 26 to give victims another safe way to seek advice
and support.

"These unpleasant individuals spell nothing but misery for
those who borrow money from them," team head Tony Quigley said.

Based on data from 2018 and 2019, the organisation said it
took an average of 2.75 years for someone targeted by predatory
lenders to engage with the authorities, suggesting any spike in
loan shark activity now might not be visible until 2023.

Analysts say it is no surprise subprime lenders are acting
cautiously. Even in benign market conditions, companies serving
subprime customers typically absorb higher defaults than banks
who focus on higher-quality borrowers.

In 2019, 13.6% of the loans made by Provident's subprime
credit card business Vanquis turned bad, while the so-called
impairment rate for its doorstep lending was 39%.

But for loans made by Royal Bank of Scotland, for
example, which tends to lend to people with better credit
ratings and focuses on mortgages, the rate was just 0.21%.

With little consensus on the outlook for the British
economy, few mainstream lenders say they are prepared to help
borrowers who didn't measure up before the pandemic.

David Duffy, chief executive of Virgin Money, said
the bank was prioritising existing clients and had not
considered altering its lending criteria to offer credit to
subprime borrowers.

A spokesman for the banking trade body UK Finance, said:
"Lenders work hard to ensure the balance is right between
helping customers to budget effectively and meet their payment
needs while lending responsibly and ensuring longer-term
affordability."

Others were more blunt about a subprime shutout.

"It's almost certain people won't be able to get credit,"
one senior banking executive said. "Clearly if you are in that
category, then you are in a much more difficult scenario."
($1 = 0.8156 pounds)
(Editing by David Clarke)