Card issuers wary of government's bad bank plan amid rising delinquency rates
Credit card loan ads are displayed on a street in Seoul, Sept. 29, 2024. Yonhap
Credit card issuers are voicing concerns that the government’s debt relief program, called the bad bank initiative, could further weigh on their profitability as they are already facing higher credit costs due to rising delinquency rates, industry officials said Tuesday.
But some in the industry say the plan could aid in clearing nonperforming loans, depending on the cost-sharing arrangements.
The state-run Korea Asset Management Corp. is moving forward with plans to set up a bad bank worth 800 billion won ($576 million), aimed at restructuring debt for financially vulnerable individuals.
A bad bank is an entity that purchases nonperforming assets or loans at a discounted rate to facilitate their resolution. This initiative focuses on individuals holding unsecured debts of up to 50 million won that have been delinquent for over seven years.
Half of the 800 billion won funding — 400 billion won — is expected to come from contributions by financial institutions.
The government initially planned for banks to shoulder the full 400 billion won, but later expanded the burden to include securities, insurance and credit card firms, mindful that many of the debts targeted for write-off are held by secondary financial institutions.
This has triggered resistance from these sectors, which argue that worsening business conditions have already left them financially strained.
The credit card industry, in particular, has seen a sharp decline in net profits due to rising loan loss provisions. The combined net profits of six major credit card companies dropped 18.1 percent year-on-year to 1.12 trillion won in the first half of the year, while loan loss provisions rose 10.5 percent to 1.95 trillion won during the same period.
Credit card firms worry that the debt recovery environment will deteriorate further in the latter half of the year amid growing challenges such as tightening household loan regulations.
They also caution that the bad bank initiative may prompt borrowers to deliberately postpone repayments, and a further increase in delinquency rates would exacerbate pressures on profitability and asset quality management.
“Raising additional capital is likely to be difficult amid generally weak market conditions,” a credit card industry official said.
Some, meanwhile, believe that the bad bank could alleviate some of the companies’ burdens, depending on the scale of their contributions.
“If the contribution rate remains low, the bad bank could serve as a chance for card issuers to lessen their bad debt exposure with the help of government resources,” another industry official noted.