Barclays is expected to announce that it is writing off a record £1.67 billion because of defaulting British consumers as it reports its full-year results today. Later this week Lloyds TSB will wave goodbye to £1.26 billion or so, followed by HBOS (£1.24 billion), Royal Bank of Scotland (£1.34 billion) and HSBC (£943 million).

By the end of the bank reporting season the banks will have written off an unprecedented £6.64 billion of duff loans to UK personal customers alone, according to Citigroup forecasts. That is 20 per cent higher than in 2005, which itself was 50 per cent higher than 2004.

Britons are defaulting on unprecedented amounts of debt. After years of racking up debt on credit cards and store cards and through personal loans and overdrafts, many are in financial trouble. More than one million have fallen behind on interest payments, according to the Financial Services Authority, and another two million are “continually struggling”.

The debt advice firm Debt Free Direct estimates that there are one to two million households it classes as “permanently indebted” — meaning that while managing to juggle their debts and meet minimum interest payments, they will never repay the principal.

With credit card companies asking for as little as 2.5 per cent of the outstanding debt in minimum repayments each month, huge numbers of borrowers may not be flashing warning signals at the banks, yet have no realistic hope of repaying the money. Unless they come into a lottery win or an inheritance, this army on the brink will one day join the ranks of the fully insolvent.

Yet the banks are barely blinking. Over the next two weeks they will unveil total pretax profits of close to £40 billion, their bruises in personal lending more than salved by bumper returns from other retail products and from corporate banking. Moreover, bad debts are priced into the unsecured lending model.

Even so, bank shareholders have become uneasy and bank shares are trading at very low valuations — both by dividend yield and price/earnings ratios.

The City is divided over whether there is worse to come. The signals are mixed. Personal involvencies are still rocketing. But Antony Broadbent of Sanford Bernstein is one of the optimists, arguing that we are at the worst point of the credit cycle and that personal loan losses will peak very soon.

Banks have been tightening their lending criteria for three years and growth rates in new lending have been falling. The rise in the unemployment rate is slowing and is forecast to peak in the late summer.

Citigroup, which monitors arrears of companies that securitise credit card debts, is also encouraged. Cardholders falling behind on payments appear to have stabilised. Even so, it believes that bad debts on personal lending will worsen to £7.2 billion in 2007, £7.4 billion in 2008 and £7.6 billion in 2009.

Mark Thomas of Keefe Bruyette & Woods takes a gloomier view. While acknowledging that the absolute numbers of defaulters may soon peak, he argues that the severity of the losses will continue to worsen.

Moreover, all City forecasts are predicated on a benign economic outlook for the next few years.

Write-offs today are almost twice as much as a proportion of the loan book as they were in the depths of the early 1990s recession, when unemployment and interest rates were three times as high. With record numbers already walking away from their debts, the move to insolvency could turn into a stampede in the event of a recession.