Restrictions on card issuance

By Kim Tae-jong

Those with monthly disposable income of 500,000 won or less won’t be able to have a credit card due to strengthened regulations on credit card issuance, according to the nation’s financial authorities, Sunday.

The move came as an effort to reduce high delinquent rates by only allowing customers with ability to repay their card bills. It is also a measure to reform the business practices of card issuers which have enjoyed growing profits amid the concerns over snowballing household debts.

Under the new guidelines introduced Sunday by the Financial Services Commission (FSC) and Financial Supervisory Service (FSS), local card firms, from now on, will be banned from issuing plastics to those who earn 500,000 won or less. The FSS said that the important criterion in the credit card issuance is the amount of monthly disposable income.

“Monthly disposable income will be used as a barometer for determining eligibility for issuing credit cards to customers as well as setting the monthly limit of payment,” an official said. Disposable income is total personal income minus personal current taxes and monthly repayment of loans.

For example, under the new guideline, those who earn 3 million won salary cannot have a credit card if the amount of monthly repayment surpasses 2.5 million won.

Credit ratings will be also taken into consideration.

Those with credit ratings between 1 and 6 will not be subject to the new regulations, but others with lower credit ratings will be screened when they apply for the issuance or re-issuance of credit cards.

The reason is that the delinquent rate of those with credit ratings between 1 and 6 stands only at 0.4 percent, while those with credit ratings between 7 and 10 stood at 9.0 percent.

“Last year, about 6.3 million credit cards were issued, and about 300,000 cards were issued to those lacking the ability to repay their bills or with multiple loans,” the official said.

The financial authorities also set a credit limit for loans against credit cards, or better known as card loans here, which have emerged as a new threat to the financial market because of its rapid proliferation.

The amount of card loans will be subject to the credit limit of cardholders. For example, if a cardholder’s monthly bill is 2 million won with his or her limit at 3 million won, he or she can only get credit card loans worth up to 1 million won

Another FSS official said the measure is a preventive step to stop cardholders from becoming delinquent borrowers.

“It aims to prevent people who do not control their expenses from becoming delinquent borrowers utilizing credit card loans and cash-advance services,” he said.

According to recent data, the number of delinquent borrowers stood at 176,000 in 2011, up about 30 percent from the previous year. The default rate in card loans witnessed its steepest increase last year, even higher than 2009, a year after the nation was feeling the pinch of the global recession.

But the new regulations attracted immediate criticism from within the financial industry, which fears the measures might squeeze their profits.

Last year, card firms enjoyed massive growth with their combined net profit at 1.5 trillion won, but the Credit Finance Association expects that the new regulations will cause about 150 billion won reduction in their profits.

This is one more case in a series of objections raised by the financial industry against increasing regulations on their businesses. Financial regulatory institutions have also strengthened regulations on their revolving loans and credit card loans since household debts became a major threat to the economy.