Credit card woes again?

Banks should refrain from profit-only mentality

Local commercial banks are seeking to spin off their credit card operations into separate companies in a bid to maximize their profits. In a capitalist society with a market economy system, they are free to do what they want. However, their move could revive the specter of the 2003 credit card crisis that drove 4 million Koreans to bankruptcy.

The spin-off could be seen as somewhat inevitable as the local banking sector has already reached saturation point amid a prolonged slump in the property market. In this situation, commercial banks’ best option is to beef up their credit card business that offers greater profitability than their banking operation.

Kang Man-soo, chairman and CEO of the state-run KDB Financial Group, has taken a critical position about the banks’ move toward credit cards. Last week he accused major private banks of trying to make money by increasing usurious credit card loans. He probably has the guts to criticize the banks because he is a former minister of strategy and finance. He is still more of a financial policymaker and supervisor for the banking sector. But his criticism is reasonable because he hit the nail on the head as for the problem of commercial banks.

The KDB chairman did not hesitate to claim that savings banks had to turn to making loans for building projects after four major commercial banks were eating away the former’s market by ramping up credit card loans to relatively low income earners. His claim is not 100 percent right. But commercial banks are partly responsible for bringing about the so-called project financing woes for saving banks.

The nation’s largest lender KB has already set up a credit card firm by separating its card business from the bank. Others like Woori Bank and Korea Exchange Bank are trying to follow suit. Shinhan Financial Group earned about 2.3 trillion won ($2.1 billion) in net profit last year, of which 1.1 trillion won ($1 billion) came from its card unit. The high profitability of the card business is possible because average annual interest rates for credit card loans stand at 15 to 16 percent, much higher than 7-9 percent for bank loans.

The nation’s total outstanding credit card loans surged 38 percent year-on-year to 24.9 trillion won ($22.8 billion) in 2010. Their default rate remains low, but they may rise rapidly as the central bank is expected to raise its interest rates by a considerable margin this year to rein in mounting inflationary pressure. Thus, banks had better refrain from recklessly extending card loans to avoid a potential default crisis. The government and regulators should tighten its oversight on banks and credit card firms to preclude a recurrence of the 2003 woes.