While businesses have little appetite for bank loans these days, consumers are filing into branches for low-interest credit, triggering a surge in the installment loan business at many banks in the Northeast.

Bankers welcome the influx, saying it will boost their bottom lines, shift their loan mix toward more profitable consumer businesses and away from commercial credits, and build cross-selling opportunities with new customers.

But economists warn that making more loans to consumers has a potential dark side. The specter of rising delinquency rates looms, driven by expectations in some corners that new taxes and health-care reform could bite deep into consumer's wallets.

High Standards a Must

Experts say banks must be vigilant in keeping underwriting standards high to guard against higher chargeoffs down the road.

Rising consumer loan delinquencies are a "real danger," said Bernard Markstein, chief economist at Meridian Bancorp.

"Banks might get a little wild in this area and stop paying attention to those basic credit-scoring standards." said Mr. Markstein. "If the economy slows down and there are more layoffs, clearly consumer loans are the most vulnerable."

For now, delinquency rates are low, making most bankers confident about soliciting and approving a steady flow of applications for direct and indirect auto, home equity, personal loans, and credit cards.

While the growth in total installment loans at banks over the last year has been unexciting -- just 3.2% to $390 billion in the first six months of this year, according to the Federal Deposit Insurance Corp. -- bankers say demand has jumped recently.

In July alone, banks' consumer credit outstandings grew more than $4 billion to $339.6 billion from $335 billion in June, according to the Federal Reserve Board. Total consumer borrowing rose by $5.1 billion to $755.9 billion in July.

Michael A. Butler, senior vice president in charge of loan review at Keycorp, has tracked an 11% rise in indirect auto loans (made through dealers) over the past few months at the Albany, N.Y.-based company.

"It's predominantly in auto loans, and it's occurring mainly in New York, but we're also having good experience in Washington, Utah, and Idaho," said Mr. Butler. "The consumer pattern has been one where people are using the dealership for financing rather than our branches."

Keycorp has been targeting dealerships through its middle-market lending group.

"We're pushing the dealership program very heavily because we're having a difficult time getting the consumer into the branch," Mr. Butler said.

Auto loans made by commercial banks were up $7 billion, or 6%,to $116.7 billion in the January-to-July period, according to the Federal Reserve Board.

Home equity products also are selling. (See article on page 18 for a ranking of top home-equity lenders.)

First Pennsylvania Bank, a subsidiary of CoreStates Financial Corp., said demand for home equity loans and lines started picking up earlier this year, and are now 40% to 50% higher than last year.

Debt Consolidation

David Durnan, a vice president in charge of marketing product management at First Pennsylvania, said consumers are taking advantage of low interest rates to consolidate higher-interest debt with home equity products.

Bankers at Natwest Bancorp, the $23 billion-asset U.S. subsidiary of London-based National Westminster Bank PLC, report similar trends.

While most direct-loan categories flat to down, home equity lending has grown at a double-digit rate over the last six months, said Andrew K. Haste, senior vice president of the consumer loan products division.

The growth is tied to several new marketing campaigns, one of which urges consumers to take advantage of low-interest home equity lines to consolidate credit card debt.

When Natwest's own credit card customers accept the debt-retirement pitch to pay down their balances, the bank is losing interest income, Mr. Haste acknowledged. But the important point, he emphasized, is that the bank retains the customer relationship.

"If we don't [offer debt consolidation alternatives], someone else will," Mr. Haste said. "Nonbanks play a substantial role in whittling away banks' direct-lending business."

Indeed, banks are keeping a close watch on competitors from outside as well as inside banking. Though consumer lending is one of the most profitable businesses at banks, margins are being squeezed because of largescale pricing changes, analysts said.

"Some of the growth in consumer lending is going into the bottom line, and some is going into repricing," said John Leonard, an analyst at Salomon Brothers Inc.

Finance Firms Lag

Although finance companies, such as Household Finance Corp. and The Money Store, hold a significant share of the market for consumer credit, they still lag behind the banks.

According to the Fed, finance companies had $113 billion in consumer installment outstandings in July, compared with $339.6 billion for commercial banks.

While banks' outstandings advanced almost 4% from a year ago, finance companies' outstandings dropped 3% over the same period.

Some banks are fighting off nonbank competition by developing specific consumer lending niches. For example, Bank of New York Co. has seen a dramatic rise in its card business as it focused on the low end of the consumer market by heavily promoting a no-fee, no-frills card.

As a result, its credit card outstandings have grown 25% to $5.5 billion over the last year. The bank now has 4.3 million cards in circulation.

Richard D. Field, senior executive vice president at the bank said he expects the dramatic growth to continue.

"There's still a huge market of higher-rate credit cards out there," said Mr. Field. "Many of our competitors can't afford to give them up because they don't have a low-cost operation."

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