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Showing posts with label Credit (finance). Show all posts
Showing posts with label Credit (finance). Show all posts

Thursday 6 February 2014

Southeast Asia's Boom Is a Bubble-Driven Illusion?



Since the Global Financial Crisis, Southeast Asia has been one of the world’s few bright spots for economic growth and investment returns. With its relatively young population of 600 million and its growing middle class, Southeast Asia has been the scene of a modern-day gold rush as international companies clamor to get a piece of the action. Unfortunately, my research has found that much of this region’s growth in recent years has been driven by ballooning credit and asset bubbles – a pattern that is also occurring in numerous emerging economies across the globe.

In the past few months, I have published reports about the growing bubbles in Singapore, Malaysia, Thailand, the Philippines, and Indonesia, and I will use this report to explain the region’s economic bubble as a whole. My five Southeast Asian country reports have generated quite a bit of interest and controversy, and were read nearly 1.3 million times, and were publicly denied by the central banks of Singapore, Malaysia, and the Philippines.

Ultra-low interest rates in the U.S., Europe, and Japan, combined with the U.S. Federal Reserve’s $3 trillion-and-counting quantitative easing programs caused a $4 trillion torrent of speculative “hot money” to flow into emerging market investments from 2009 to 2013. A global carry trade arose in which investors borrowed significant sums of capital at low interest rates from the U.S. and Japan for the purpose of purchasing higher-yielding emerging market investments and earning the difference. The surging foreign demand for emerging market investments created bubbles in those assets, especially in bonds. The emerging markets bond bubble resulted in record low borrowing costs for developing nations’ governments and corporations, and helped to inflate dangerous credit and property bubbles across the emerging world.

The flow of hot money into Southeast Asia after the financial crisis caused the region’s currencies to rise strongly against the U.S. dollar, such as the Singapore dollar’s 22 percent increase, the Philippine peso and Malaysian ringgit’s 25 percent increase, the Thai baht and Vietnamese dong’s 30 percent increase, and the Indonesian’s rupiah’s 50 percent increase, which has been subsequently negated now that foreign capital has begun to flow out of Indonesia’s economy.

The post-Crisis bond bubble helped to reduce government bond yields in Singapore, Thailand, Indonesia, Malaysia, and the Philippines (click links for charts), while foreign institutional holdings of many Asian sovereign bonds increased dramatically:

Foreign Holdings Of Malaysian Bonds

Foreign direct investment into several Southeast Asian countries - particularly Singapore, Malaysia, and Indonesia – immediately surged to new highs after the Global Financial Crisis.
Here’s the chart of Singapore’s FDI (net inflows, current dollars):

SingaporeFDI2

Malaysia’s FDI (net inflows, current dollars):

Malaysian Foreign Direct Investment

Indonesia’s FDI (net inflows, current dollars):

Indonesian FDI

How Record Low Interest Rates Are Fueling The Bubble

The emerging markets bond bubble helped to push EM corporate and government borrowing costs to all-time lows, but there is another factor that is causing the inflation of bubbles in Southeast Asia: record low bank loan rates. Large corporations have a choice to borrow from either the bond market or directly from banks, and typically choose the option that provides the lowest borrowing costs.

Western benchmark interest rates – particularly the LIBOR or London Interbank Offered Rate – are used to price bank loans in numerous countries throughout the entire world, and most have been hovering just above zero percent in the five years since the Global Financial Crisis. Most Western economies were hit extremely hard in the financial crisis and have faced a constant threat of falling into a deflationary trap since then, which is why their benchmark interest rates have been at virtually zero. In the U.S. Federal Reserve’s case, it has been running what is known as ZIRP or zero-interest rate policy.

Here is the chart of the LIBOR interest rate:

Libor

Due to the fact that the West was the primary epicenter of the 2003 to 2007 bubble economy and ensuing Global Financial Crisis, emerging market economies were able to rebound more quickly and continue growing at a much greater rate. While many Southeast Asian economies have been growing at a 5 percent or greater annual rate since 2008, they have been able to borrow at record low Western interest rates such as those based on the LIBOR. LIBOR is used as the base rate for nearly two-thirds of all large-scale corporate borrowings in Asia. Western interest rates are too low relative to Southeast Asia’s economic growth and inflation rates, so a large-scale borrowing binge has been occurring as a side-effect. Southeast Asia’s credit bubble may balloon even larger because Western benchmark interest rates are likely to stay at very low levels for several more years.

Local benchmark interest rates in many Southeast Asian countries have hit record lows since 2008 as well. Local interest rates are used for approximately one-third of large-scale corporate loans in Asia, as well as most consumer, mortgage, and smaller business loans. Southeast Asian central banks have kept their benchmark interest rates low to stem export-harming currency appreciation that has resulted from capital inflows since the financial crisis.

The chart below is Singapore’s benchmark interest rate, or SIBOR, which is commonly used as a reference rate for loans throughout Southeast Asia:

singapore-interbank-rate

Here is Malaysia’s bank lending rate chart:
malaysia-bank-lending-rate

The Philippines’ bank lending rate:
philippines-bank-lending-rate

Indonesia’s benchmark interest rate:
Indonesia's Benchmark Interest Rate
Thailand's benchmark interest rate:
thailand-interest-rate

Southeast Asia’s Boom Is Driven By A Credit Bubble

Abnormally cheap credit conditions have led to the inflation of credit bubbles across Southeast Asia, which have been a significant driver of the region’s economic growth in recent years.

Singapore’s total outstanding private sector loans have soared by 133 percent since 2010:


singapore-loans-to-private-sector

Malaysia’s private sector loans have increased by over 80 percent since 2008:
Malaysia Loans to Private Sector

The Philippines’ M3 money supply, a broad measure of total money and credit in the economy, has more than doubled since 2008, and sharply accelerated in 2013 as interest rates hit new lows:
Philippines M3 Money Supply

Indonesia’s private sector loans have risen by nearly 50 percent in the past two years:
indonesia-loans-to-private-sector

Thailand’s private sector loans have risen by over 50 percent since the start of 2010:
Thailand Loans To Private Sector

Though dangerous credit bubbles are inflating across Southeast Asia, some countries’ credit bubbles are driven primarily by consumer or household debt, while others are driven mainly by commercial sector borrowing, particularly for construction and property development. Singapore, Malaysia, and Thailand’s credit bubbles have a significant household debt component as the chart below shows:
BWNLMLjCQAAdNZ-9


Singapore’s household debt-to-GDP ratio recently hit nearly 75 percent, which is up from 55 percent in 2010 and 45 percent in 2005. Though Singapore’s total outstanding household debt has increased by 41 percent since 2010, the city-state’s household income and wages have increased by a mere 25 percent and 15 percent respectively.

Malaysia now has Southeast Asia’s highest household debt load after its household debt-to-GDP ratio hit a record 83 percent, which is up from 70 percent in 2009, and up from just 39 percent at the start of the Asian Financial Crisis in 1997. Malaysian household debt has grown by approximately 12 percent annually each year since 2008.

Thailand’s household debt-to-GDP ratio also hit a recent record of 77 percent, which is up from 55 percent in 2008, and just 45 percent a decade ago. Total lending to Thai households increased at a 17 percent annual rate from 2010 to 2012, while household credit provided by credit card, leasing and personal loan companies rose at an alarming 27 percent annual rate.

Property Bubbles Are Ballooning Across Southeast Asia 

Ultra-low interest rates in Southeast Asia have helped to inflate property bubbles throughout the region, which has also contributed to the staggering rise in household debt.

Singapore’s mortgage rates are based upon the SIBOR rate discussed earlier, which has been held at under one percent for over five years. Singapore’s property prices have roughly doubled since 2004, and are up by 60 percent since 2009 alone:

Singapore-Housing-Bubble
Source: GlobalPropertyGuide.com 

The average price of a new 1,000-square-foot condo has risen to $1 million to $1.2 million Singapore dollars ($799,000 to $965,638 U.S.), making the city-state the world’s third most expensive residential property market behind Canada and Hong Kong. A 2013 study by The Economist magazine showed that Singapore’s residential property prices are 57 percent overvalued based on its historic price-to-rent ratio. Singapore now ranks as one of the world’s ten most expensive cities to live.

Economic bubbles and the resulting false prosperity in other Asian countries have spilled over into Singapore as investors from across the region clamor to buy properties there. In 2013, 34 percent of foreign property-buyers in Singapore were from China, 32 percent were from Indonesia, and 13 percent were from Malaysia.

Total outstanding mortgages increased by 18 percent each year over the last three years, bringing total mortgage loans to 46 percent of Singapore’s GDP from 35 percent. Almost a third of Singapore’s mortgages are utilized for speculative property purchases rather than owner occupation. Singapore’s mortgage loan bubble is one of the primary reasons why the country’s household debt has been increasing at such a high rate in recent years.

Malaysian property prices have been increasing parabolically in recent years, as the chart below shows. Mortgage loans account for nearly half of all Malaysia’s household debt, and its rapid increase is the primary driver of the country’s household debt bubble.

Malaysia Property Bubble Chart


Prices have nearly doubled in the past decade in certain Philippine property markets, such as the Makati Central Business District (CBD):

Philippines Property Bubble

In the first six months of 2013, the average price of a 3-bedroom luxury condominium in Makati CBD rose by a frothy 12.92 percent (9.98 percent inflation-adjusted), after rising 5.6 percent in Q1 2013, 8 percent in Q4 and 8.3 percent in Q3 2012. The average price of a premium 3-bedroom condominium in Bonifacio Global City surged by 12.4 percent y-o-y, while secondary residential property prices in Rockwell Center rose by 10.6 percent y-o-y. Philippine outstanding mortgage loans are rising at an even faster rate than consumer credit, such as a 42 percent increase in 2012. The Philippines’ construction sector is expected to expand by double digits in 2014 and account for nearly half of economic growth thanks in large part to the country’s property development boom.

Though Indonesian property market data is spotty and difficult to source for all markets, Jakarta and Bali property prices are becoming frothy, especially at the higher end of the market. Jakarta condominium prices rose between 11 and 17 percent on average between the first half of 2012 and 2013, after rising by more than 50 percent since late 2008. Luxury real estate prices in Jakarta soared by 38 percent in 2012, while luxury properties in Bali rose by 20 percent – the strongest price increases of all global luxury housing markets.  A small two-room apartment on the outskirts of Jakarta can cost nearly $80,000 USD (RM253,373), making housing unaffordable for many ordinary Indonesians. From June 2012 to May 2013, outstanding loans for apartment purchases nearly doubled from IDR 6.56 trillion (USD $659.3 million) to IDR 11.42 trillion (USD $1.15 billion).

Thailand’s property bubble is centered primarily in the condo market, which is the most common type of dwelling for Bangkok residents, and is the speculative vehicle of choice for foreign investors who typically hail from Singapore and Hong Kong. According to Bank of Thailand, condo prices soared by 9.39 percent, while townhouses prices rose by 6.86 percent in Q1 2013, after rising by similar amounts for the past several years. The majority of new mortgages originated are concentrated at the lower end of the Thai housing market, and Bank of Thailand warned that low interest rate home loans could cause a property bubble.

Boonchai Bencharongkul, a wealthy Thai industrialist, said “I think the current situation is worrisome. As one of those who had such an experience, I can smell it now. People are rushing and competing to buy condos while more and more people are driving Ferraris. These are the same things we saw before the 1997 crisis occurred.”

Construction Bubbles Abound Across Southeast Asia

Low interest rates and soaring property prices create the perfect conditions for construction bubbles, which is what occurred in Ireland, Spain, the United States, and other countries from 2003 to 2007, and what has been occurring throughout Southeast Asia in recent years. Construction is a capital-intensive economic activity that benefits from cheap and easy credit, which is certainly the case in Southeast Asia. Southeast Asia’s construction boom has been focused on condominium and residential property development, hotels, resorts, casinos, malls, airports, infrastructure projects, and skyscrapers.

Construction has been the most significant contributor to Singapore’s economic growth since 2008, as the chart below shows:

Singapore Construction Bubble

Construction industry work permits rose to 306,500 in June 2013 from 180,000 at the end-2007, which was the peak of Singapore’s economic boom before the financial crisis hit. Singapore’s construction boom has been driving an over 18 percent annual increase in total outstanding building and construction loans in recent years. Bank loans for building and construction, and mortgages recently rose to 79 percent of Singapore’s GDP, which is up from 62 percent in 2010.

Casino and resort construction has become a strong driver of building activity ever since gambling became legal in Singapore in 2010. The Marina Bay Sands and Resorts World Sentosa opened in 2010 at a cost of over $10 billion. Singapore has also been aggressively upgrading and expanding its Changi International Airport, which has been a driver of construction activity. There is so much construction activity in Singapore that the country has 306,500 construction workers (compared to its 5.3 million population) from other Asian countries living there on work permits.

After growing by over 20 percent in 2012, Malaysia’s construction spending was expected to rise by 13 percent in 2013. Malaysia’s plan to build the tallest building in Southeast Asia, the 118-story Warisan Merdeka Tower, are a major red flag according to the Skyscraper Index, which posits that ambitious skyscraper projects are a common hallmark of economic bubbles.

In the Philippines, casinos, condominiums, and shopping malls have been driving construction activity. The Philippines now hosts 9 of the world’s 38 largest malls – beating even the U.S., China, and most other developed countries. The Philippines’ construction sector is expected to expand by double digits in 2014, and account for nearly half of the country’s economic growth.

Indonesia has been experiencing a construction boom in every sector, including hotels, condominiums, infrastructure, airports, and government buildings. At least 61 new hotels are confirmed to open in Jakarta by 2015. Indonesian construction contracts were estimated at more than $40 billion in 2013, up from $32.4 billion in 2012.

Thailand’s construction boom has been centered upon condominium development and infrastructure projects, which are funded by the government’s deficit spending. Construction spending is expected to grow by nearly 7 percent annually for the next five years.

Governments Are Borrowing To Create Economic Growth

The governments of Thailand and Malaysia have been taking advantage of low borrowing costs – courtesy of the emerging markets bond bubble – to finance deficit spending for the purpose of boosting economic growth.

Since 2010, Malaysia’s public debt-to-GDP ratio has been at all time highs of over 50 percent due to large fiscal deficits that were incurred when an aggressive stimulus package was launched to boost the country’s economy during the Global Financial Crisis. Malaysia now has the second highest public debt-to-GDP ratio among 13 emerging Asian countries according to a Bloomberg study. Malaysia’s high public debt burden led to a sovereign credit rating outlook downgrade by Fitch in July.

Malaysia Government Debt to GDP Malaysia’s Malaysia's government has been running a budget deficit since 1999:
Malaysia Government Budget Deficit

Thailand’s government spending ramped up significantly in 2012 after the launch of a $2.5 billion first car tax rebate program that was fraught with problems as well as an unsuccessful rice subsidy scheme that lost the government 136 billion baht or $4.4 billion even though it was promoted as cost-neutral. Thailand’s government also plans to spend 2 trillion baht ($64 billion) – nearly one-fifth of the country’s GDP – by 2020 on growth-driving infrastructure projects, including a network of high-speed railway lines to connect the country’s four main regions with Bangkok. The interest alone on this new debt will cost another 3 trillion baht over the next five decades.

Thailand’s government spending is up by nearly 40 percent since 2008:
Thailand Government Spending
The country’s government has been running a budget deficit since 2008 to support its spending:

Thailand Government Budget Deficit

A wealthy Thai industrialist, Boonchai Bencharongkul, warned against excessive government spending, saying “This time, the nature of the crisis might be different. Last time it was the private sector that went bankrupt, but this time we might see the government collapse.” Sawasdi Horrungruang, founder of NTS Steel Group, cautioned that Thailand’s government should not borrow beyond its ability to service its debt, which will eventually become the burden of taxpayers.

How Singapore’s Financial Sector Is Driving The Bubble

Singapore has grown to become Southeast Asia’s banking and financial center, and the region’s rise – and inflating economic bubble – in recent years has helped the city-state to earn the nickname “The Switzerland of Asia.” Singapore’s financial sector is now six times larger than its economy, with local and foreign banks holding assets worth S$2.1 trillion (US$1.7 trillion). The Singaporean financial sector’s assets under management (AUM) have increased at a 9 percent annual rate from 2007 to 2012, but surged 22 percent in 2012. The primary reason for the country’s rapid AUM growth is its growing role as a banking hub in Southeast Asia, and it has been riding the coattails of the region’s economic bubble. A full 70 percent of assets managed in Singapore were invested in Asia in 2013, which is up from 60 percent in 2012. Singapore’s financial services industry grew 163% between 2008 and 2012.

Singapore’s banks have been contributing to the inflation of Southeast Asia’s economic bubble due to their use of the abnormally-low SIBOR as a reference rate for loans made throughout the region.

Here is the chart of the SIBOR interest rate as a reminder of how low it has been for the past half-decade:

singapore-interbank-rate

To learn more about Singapore’s financial sector and its role in inflating Southeast Asia’s economic bubble, please read this section of my detailed report about Singapore’s bubble economy.

How China Is Driving Southeast Asia’s Bubble

Economic bubbles are not confined to Southeast Asia, unfortunately; since 2008, China’s economy has devolved into a massive economic bubble that has been contributing to Southeast Asia’s bubble.
Here are a few statistics that show how large China’s bubble has become:
  • China’s total domestic credit more than doubled to $23 trillion from $9 trillion in 2008, which is equivalent to adding the entire U.S. commercial banking sector.
  • Borrowing has risen as a share of China’s national income to more than 200 percent, from 135 percent in 2008.
  • China’s credit growth rate is now faster than Japan’s before its 1990 bust and America’s before 2008, with half of that growth in the shadow-banking sector.
As mentioned at the beginning of this report, China’s government has encouraged the construction of countless cities and infrastructure projects to generate economic growth. Many of China’s cities, malls, and other buildings are still completely empty and unused even years after their completion, as these eerie, must-see satellite images show.

China has a classic property bubble that has resulted in soaring property prices in the past several years. A recent report showed that property prices increased 20 percent in Guangzhou and Shenzhen from a year earlier, and jumped 18 percent in Shanghai and 16 percent in Beijing.

China’s inflating economic bubble has generated an incredible amount wealth (albeit much of it temporary), a portion of which has flowed into Southeast Asia. Wealthy Chinese have been buying condominiums in desirable locations across Southeast Asia, and its notoriously free-spending gamblers are the primary reason for the casino building boom in numerous Southeast Asian countries, particularly in Singapore and the Philippines. Chinese companies have been investing and lending heavily in Southeast Asia, with a strong focus on the natural resources sector.

From 2002 to 2012, China’s bilateral trade with Southeast Asia increased 23.6 percent annually, and China is now Southeast Asia’s largest trade partner, while Southeast Asia is China’s third-largest trade partner.

Though several lengthy books can be written about China’s rise, economic bubble, and how it affects Southeast Asia, my goal is to succinctly show how dangerous China’s economic bubble has become and emphasize the fact that Southeast Asia’s economy has been benefiting from China’s false prosperity. The eventual popping of China’s bubble will send a devastating shockwave throughout Southeast Asia’s economy, which will contribute to the ending of the region’s bubble economy.

The Role Of Southeast Asia’s Frontier Economies

This report has focused primarily on the larger, more developed Southeast Asian countries because they have a far greater influence on the region’s economy compared to the “frontier” economies of Vietnam, Cambodia, Laos, and Burma (Myanmar). The five largest Southeast Asian economies also have more advanced financial markets that are better integrated with global financial markets, and thus pose a greater systemic financial risk than the region’s frontier economies.

Southeast Asia’s frontier economies have been growing rapidly in recent years for many of the same reasons as their more developed neighbors, including:
  • Rising trade with China
  • Rising Chinese investment
  • Increasing intraregional trade
  • Loose global monetary conditions and “hot money”
  • Higher commodities prices
  • Credit and property bubbles
Vietnam experienced a property and credit bubble that popped several years ago and saddled the country’s banking system with bad loans. International realty firm CB Richard Ellis warned last year that Phnom Penh, Cambodia was experiencing a property bubble. Some local observers have suspected that property prices in Vientiane, Laos were in a bubble. Property prices in Yangon, Burma have exploded higher in recent years making commercial rents more expensive than in Manhattan.

While relevant data is few and far between, it is not unreasonable to believe that Southeast Asia’s frontier economies are experiencing froth or bubbles of their own for the same reasons as larger economies in the region. Vietnam, Cambodia, Laos, and Burma are dangerously exposed to the eventual popping of China’s economic bubble as well as the popping of Southeast Asia’s overall bubble.

Cracks Are Beginning To Show

Southeast Asia’s financial markets were strong performers in late-2012 and early-2013 until news of the U.S. Federal Reserve’s QE taper plans surfaced in the Spring of 2013, causing many of these markets to fall sharply due to fears of reduced stimulus. This rout did not come as a surprise to me as I had been warning that hot money flows were inflating asset bubbles in emerging market countries, and I even published a report titled “All The Money We’re Pouring Into Emerging Markets Has Created A Massive Bubble” just a few months before these markets plunged. The sensitivity of emerging market asset prices and currencies to the U.S. Federal Reserve’s stimulus programs was an additional confirmation that the emerging markets bubble owed its existence largely to hot money flows. The ultimate ending of the Fed’s current “ QE3″ program – which many economists expect this year – is likely to put further pressure on emerging markets and contribute to the popping of their bubbles.

While most of Southeast Asia’s financial markets and currencies have been treading water since last Spring’s taper panic, Indonesia’s situation has continued to deteriorate, causing the rupiah currency to significantly weaken due to capital outflows. The rupiah is down by nearly 50 percent from its 2011 peak. Indonesia was hit harder by the taper panic than other Southeast Asian countries because of its worsening trade and current account deficits.

Thailand has been embroiled in political turmoil in recent months as opposition protestors have been demanding the resignation of Prime Minister Yingluck Shinawatra. Opposition members claim that Yingluck is carrying on the same corrupt practices as her billionaire brother, former Prime Minister Thaksin Shinawatra, who was ousted in a military coup in 2006. The protests have harmed Thailand’s tourism industry, which is expected to slow 2014 economic growth to half of what it would have been without the demonstrations. Thailand’s stock market has fallen sharply in recent months as a result of the political strife.

How Southeast Asia’s Bubble Will Pop

Southeast Asia’s economic bubble will most likely pop when the bubbles in China and emerging markets pop and as global and local interest rates eventually rise, which are what inflated the region’s credit and asset bubbles in the first place. Southeast Asia’s bubble economy may continue to inflate for several more years if the U.S. Fed Funds Rate, LIBOR, and SIBOR continue to be held at such low levels.

I expect the ultimate popping of the emerging markets bubble to cause another crisis that is similar (though not identical in every technical sense) to the 1997 Asian Financial Crisis, and there is a strong chance that it will be even worse this time due to the fact that more countries are involved (Latin America, China, and Africa), and because the global economy is in a much weaker state now than it was during the booming late-1990s.

I recommend taking the time to read my detailed reports on Singapore, Malaysia, Thailand, the Philippines, and Indonesia to get a better understanding of Southeast Asia’s economic bubble.

In the coming months, I will be publishing more reports about bubbles that are developing around the entire world – most of which you probably never knew existed. Please follow me on Twitter, Google+ and like my Facebook page to keep up with the latest economic bubble news and my related commentary.

Jesse Colombo By Jesse Colombo, Forbes Contributor
I'm an economic analyst who is warning of dangerous post-2009 bubbles

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1. Asian central banks fix the mess created by their governments 

Sunday 20 May 2012

Consumers' Debt trap of payday loans in UK

 
A third of people experienced greater financial problems as a result of taking out a payday loan, according to Which?

Payday loans are trapping increasing numbers of consumers in a downward spiral of debt caused by exorbitant penalty charges, a consumer group has warned.

More than 60pc of people who take out payday loans are using the money for household bills or buying other essentials like food, nappies and petrol, a survey by Which? found.

The figures show an "alarming" picture of people trapped in debt caused by penalty charges because they cannot afford to pay back the loan on time, the watchdog said.

A quarter (25pc) of those who had taken out loans said they had been hit with hidden charges such as high fees for reminder letters, and one in five (18pc) were not able to pay back their loan on time.

A third of people (33pc) experienced greater financial problems as a result of taking out a payday loan, and 45pc of them were hit with unexpected charges.
Which? said the debt trap was compounded with 57pc being encouraged to take out further loans and 45pc rolling over their loans at least once.

A third of people (33pc) were bombarded with unsolicited calls, texts and emails before they had even signed an agreement.

The investigation of 34 payday loans companies' websites also found that customers could face a £150 charge by one company, Quid24.com, if they repaid their loan 10 days late. Most of the companies failed to show clearly their charges or charged excessive amounts for defaulting.

Consumers were also potentially being allowed to take on credit they could not afford, with eight out of 34 companies failing to carry out any credit checks as part of their approval procedure and nearly two-thirds of those surveyed not asked about any aspect of their financial situation apart from their salary.

Some websites failed to provide any terms and conditions and many of those that did had little or no information about a borrower's rights and obligations or references to free debt advice.

Which? is calling on the Office of Fair Trading to enforce existing consumer credit and lending rules that already apply to payday loans firms and to restrict the default charges that payday loans companies can charge.

Which? executive director Richard Lloyd said: "With 1.2 million people taking out a payday loan last year, it is unacceptable for this rapidly growing number of people to be inadequately protected from extortionate charges and dodgy marketing techniques.

"At its worst, this booming £2bn industry can be seriously bad news for borrowers who are struggling to afford food or pay their bills. People are getting caught up in a debt trap, whacked with high penalty charges, or encouraged to roll over payments and take out more loans at inflated rates.

"The regulator should properly enforce the existing rules that apply to this industry, but they must go further and impose a cap on the amount that lenders can charge for defaulting.

The Government should also now explore other ways to protect hard-pressed borrowers, including Australian-style measures to cap costs and promote affordable alternatives."

Consumer Focus director of financial services Sarah Brooks said: "This research throws up some extremely troubling findings and poses many uncomfortable questions about the growing payday loan sector.

We have long held concerns about the behaviour of some payday lenders and whether consumers are losing out because this industry is not regulated strongly enough.

"Our research in 2010 showed problems with inadequate affordability checks and borrowers being offered multiple new loans or roll-overs on existing loans. Which?'s findings suggest that problems have worsened in this industry and that more borrowers are finding themselves caught in debt traps. Millions are turning to these loans in the current economic climate and it is usually those on lower incomes that suffer most.

"This work is timely given the OFT's compliance review of payday lenders. There is clearly a continuing problem with payday loans and this should give further incentive, if any is needed, for the OFT to act quickly to protect consumers from spiralling debt." Telegrah