An expected rise in customers defaulting on their loans will lead to cutbacks at banks and building societies this year.

According to a survey from the Confederation of British Industry (CBI), banks and building societies are expecting to reduce costs, including job cuts, amid a sharp rise in the value of non-performing loans.

John Hitchins, UK banking leader for PricewaterhouseCoopers, said: “The value of non-performing loans (NPLs) is increasing even more rapidly than previously predicted, and further deterioration is expected as the recession bites more firmly.”

Defaults on loans is emerging as “an increasing financial and political challenge” Mr Hitchens added.

Over the three months to December, a survey-record of 50 per cent of firms reported bad debt worsened – a higher rate than expected and with little let-up predicted in the coming quarter (+48 per cent).

The expected sharp fall in revenue from loan, combined with falling profits from commission and extra regulatory costs, has led to 35 per cent of firms expecting headcounts to fall in the coming three months.

Training budgets were cut back at the fastest rate since mid 1992, the survey showed.

“The sector is subject to a sharp decline in activity levels and, for the first time in almost 20 years, a decline in profitability is predicted by every respondent,” Mr Hitchins added.