More Koreans default on card payment

By Lee Kyung-min

An increasing number of people are defaulting on credit card payments as they struggle with stagnant income growth amid a tight job market, and soaring living costs, according to plastic card issuers, Friday.

Those who took out loans from card units of three financial groups ― Woori, KEB Hana and KB Kookmin― have seen their default rate on the rise over the past year.

The shared concern is fueled by weak consumer sentiment, compounded by the government's policy including a rapid hike of hourly minimum wage and a shorter workweek, a toxic mixture of negatives that further bogs down the economy.

KEB Hana Card saw the default rate increase to 1.96 percent in the first quarter of 2019, up 0.24 percentage points from 1.72 percent a year ago.

The rate of Woori Card jumped to 1.52 percent, up 0.1 percentage point from 1.42 percent during the same period.

KB Kookmin Card saw the rate increase to 1.32, up 0.07 percentage points from 1.25 percent a year earlier.

The top market player Shinhan Card, a subsidiary of Shinhan Financial Group, saw the rate decrease to 1.37 percent, down 0.01 percentage point from 1.38 percent from a year earlier.

However, the rate has been on a steady rise since 2017 when it stood at 1.27 percent.

“It is true that we have been closely monitoring the default rate as of late, to take proper measures before the situation gets out of control,” a Shinhan Card official said.

As a precautionary measure, financial groups have increased loan loss reserves, the amount that should be set aside against a possible customer default.

KEB Hana has set aside 164.4 billion won ($141 million) for the first three months of 2019 for the reserve, nearly double the amount from a year earlier.

Similarly, KB Kookmin increased the amount to 191.7 billion won, up 16 percent from the year before.

Shinhan increased the amount by 40 percent to 251 billion won in the first quarter of 2019.

If the card firms refuse to grant new loans or extend the maturity for current loans, those with low credit would have to seek high-interest loans available only through savings banks or other lenders.

“If those people become unable to find any source of financing, their credit risk could in theory have a spillover effect in the industry,” said Yun Chang-hyun, an economist at the University of Seoul.

The bigger problem, however, is that the increase in the default rate came as a result of the government's income-led policy defined by a near 30 percent increase in the hourly minimum wage over the past two years and reducing the maximum working hours to 52 a week from 68.

“Those who cannot make payments on time are living on minimum wage jobs. They have been struggling as many SMEs have cut the number of workers following the wage hike due to unbearable increase of labor costs.”

The situation requires further monitoring given Korea's economy will be further clouded by low growth, decrease in both household and corporate income, he added.