By Kang Seung-woo
Korean credit card companies have aggressively pushed loan services as new revenue sources.
But the increasing number of loans may end up as bad to the detriment of users, which can further aggravate household debt, market watchers say.
According to the Financial Supervisory Service (FSS) and the card industry Monday, local credit card issuers lent a collective 24.9 trillion won ($22.16 billion) in 2010, up 38.3 percent from the preceding year.
The amount stood at just 8 trillion won in 2005, but since then, it has gained steady popularity, nearly tripling over the past five years.
During the cited period, Korea, Asia’s fourth-largest economy, only saw card loans diminish in 2009, when hit hard by the global financial crisis.
Shinhan Card led the field with 3.92 trillion won in card loan earnings as of the end of September 2010, while Samsung Card reaped 3.23 trillion won. Hyundai Card and Lotte Card made 2.29 trillion and 1.69 trillion won respectively.
Observers say that credit card firms’ focus on lending services to cancel out falling earnings from credit purchases is attributed to card loans rapidly emerging.
Profit from credit card sales have decreased due to the decline in card commission at small- and mid-sized affiliates.
Compared with cash advances — the main culprit of the nation’s credit card crisis in 2003 which involved more than 3 million people defaulting on their credit cards — card loan services have “weaker” regulations from the financial authorities in the process of loan issuance.
Cash advance services have also seen an earnings drop, affected by the government’s strong drive to reduce and abolish handling charges.
Borrowing money from credit card firms is much easier and less laborious than taking out a loan from banks.
Borrowers can apply to credit-card issuers over telephone or the Internet, while at banks they need to stop by in person and fill out a variety of forms.
“As the credit card market is nearing saturation, competition between firms is becoming much fiercer. With their commission from affiliates declining, they have no choice but to expand their business portfolio of card loan services,” said a Seoul-based economist.
Local credit card issuers offer loans with interest rates ranging from 6.9 to 27.5 percent, as of the end of last month, comparatively lower than rates offered by the non-banking sector, but higher than those of banks.
Most customers pay more than 20 percent interest due to their low credit rating.
“The bulk of card loan users have credit ratings in the middle or bottom of the rankings table,” said an official of a local credit card issuer.
Given that the size of loans extended to those with low-credit has also increased, critics warn that they are a huge risk to household debt.
“The current default rate of card loans is not that high, but when economic conditions falter and households become unable to repay, asset soundness may worsen and cause a situation like the 2003 credit card debacle,” the economist said.
“Recently, card companies have focused on loan services, such as card loans and revolving credit programs,” social enterprise Edumoney said in its recent report.
“New loan schemes can lead to higher household debt.”
A revolving credit program is when the user only has to pay a minimum of five percent of the outstanding balance each month, as in the United States.
In addition, recent upticks in the central bank’s key interest rate are also increasing burdens on borrowers.
The Bank of Korea (BOK) has raised its policy rate three times to 2.75 percent since July last year amid growing inflationary pressure.
Edumoney added that with inflation and high interest rate combined, loans extended by card firms could be disastrous to household debt.
Korea is facing rising household debt, as loans tallied 770 trillion won as of the end of the third quarter of 2010, up from a year earlier and up from 581 trillion won in the same period in 2006, according to the BOK. It is likely to grow this year as the BOK is ready to hike key interest rates, which end up raising the borrowing costs of commercial banks.
“Although the nation’s household debt has not crossed the critical line yet, it is getting close. The level is too high compared with major advanced economies,” said Lee Chang-seon, managing director of the financial research department at LG Economic Research Institute.
Samsung Economic Research Institute (SERI), a local think tank, echoed Lee’s opinion, saying that household debt is set to be more troublesome down the road, dented by rate increases.
According to the Financial Services Commission (FSC), the decision-making body of the FSS, the default rate of card loans has been on the decline from 5.06 percent in 2008 to 2.37 percent in June 2010.
However, in the wake of the current upturn in household loans feared to result in a pickup in defaults, the financial regulator is in a hurry to set up regulations to curb soaring loans.
The FSC plans to release guidelines on card loan business and fortify inspections on risk management. In addition, the financial regulator said that it will raise the minimum requirement for loan reserves during the first quarter of this year.
“The FSC will make sure that the local card industry will not be affected by high insolvency. Strong action will be taken on attempts to taint market orders,” said an FSC official.