Another card crisis?
“Don’t ask, don’t tell” is not just an official U.S. policy on homosexuals serving in the military. It also refers to the business practice Korean credit card companies are accused of resorting to when issuing cards to applicants with questionable credit standings.
Now regulators are out to put an end to these ill-advised card issuances and other business practices. They say they will start weekly monitoring of card issuers to ensure that they strictly follow the guidelines for credit card operations with regard to the quality of assets, card issuances and marketing expenditures.
Those who fail to toe the line, the regulators say, will be severely disciplined. Sanctions include the suspension of card issuances and the reprimand of top managers.
The regulatory measures will not be limited to disciplining errant card companies and their managers. They will also include the tightening of credit.
Card issuers, together with other consumer financing companies without access to deposits, will be deprived of the special permission to issue debentures up to 10 times their capital. Instead, leverage will be restricted to a certain ratio of total assets to net assets, possibly the industry average of 5.2. This restriction will undoubtedly prove to be most painful to those card companies that are in pursuit of aggressive expansion.
But the regulatory measures that are being taken by the Financial Services Commission and the Financial Supervisory Services are long overdue, given that the average monthly issuance of 1 million new cards last year set the alarm bells ringing.
True, it is better late than never. A modicum of solace may be found, given that action is being taken before credit card debt distress spreads to the wider financial market and causes any disruption in the real economy. Still, none of the principal stakeholders ― the government, card companies and cardholders ― can escape the criticism that they failed to learn from the 2003 card debt crisis.
During the 1999-2002 period, the number of cards increased nearly threefold, from 39 million to 105 million. The volume of total credit card transactions expanded sixfold, contributing greatly to an increase of household debt as a percentage of disposable income, from 41 percent to 64 percent. But the government had not taken action until after the card bubble was burst in 2003. In mid-March alone, the Bank of Korea had to inject trillions of won into the financial system to keep the card industry from collapsing.
Currently, the number of cards stands at 120 million, with each economically active person holding 4.8 cards on average, compared with 4.6 in 2003. Still, card companies have 50,000 agents on their payrolls, who arrange the issuance of 1 million cards per month. They reportedly offer to issue cards to people with low credit standings, many of them juggling debt with multiple cards. No wonder the amount of money borrowed on cards soared to 23.9 trillion won in 2010, up 42 percent from the previous year.
The card industry’s trouble may not be as severe now as in 2003. But runaway competition for market share may result in a second card debt crisis. That is the reason why the regulators need to act resolutely against the illegal issuance of cards to persons with low credit standings.
Another problem with card debt is that it is growing faster than overall household loans. Outstanding card loans grew 19 percent to 27.9 trillion won in a year ending on Dec. 31 last year, compared with 6 percent for the total household debt.
Card debt cannot be allowed to increase at such a high rate when an average household already has 46.11 million won in debt, or nearly 150 percent of its disposable income. When awakened to this reality, card companies will have little reason to complain about the tightening of regulations on card issuances and cash advances.
Now regulators are out to put an end to these ill-advised card issuances and other business practices. They say they will start weekly monitoring of card issuers to ensure that they strictly follow the guidelines for credit card operations with regard to the quality of assets, card issuances and marketing expenditures.
Those who fail to toe the line, the regulators say, will be severely disciplined. Sanctions include the suspension of card issuances and the reprimand of top managers.
The regulatory measures will not be limited to disciplining errant card companies and their managers. They will also include the tightening of credit.
Card issuers, together with other consumer financing companies without access to deposits, will be deprived of the special permission to issue debentures up to 10 times their capital. Instead, leverage will be restricted to a certain ratio of total assets to net assets, possibly the industry average of 5.2. This restriction will undoubtedly prove to be most painful to those card companies that are in pursuit of aggressive expansion.
But the regulatory measures that are being taken by the Financial Services Commission and the Financial Supervisory Services are long overdue, given that the average monthly issuance of 1 million new cards last year set the alarm bells ringing.
True, it is better late than never. A modicum of solace may be found, given that action is being taken before credit card debt distress spreads to the wider financial market and causes any disruption in the real economy. Still, none of the principal stakeholders ― the government, card companies and cardholders ― can escape the criticism that they failed to learn from the 2003 card debt crisis.
During the 1999-2002 period, the number of cards increased nearly threefold, from 39 million to 105 million. The volume of total credit card transactions expanded sixfold, contributing greatly to an increase of household debt as a percentage of disposable income, from 41 percent to 64 percent. But the government had not taken action until after the card bubble was burst in 2003. In mid-March alone, the Bank of Korea had to inject trillions of won into the financial system to keep the card industry from collapsing.
Currently, the number of cards stands at 120 million, with each economically active person holding 4.8 cards on average, compared with 4.6 in 2003. Still, card companies have 50,000 agents on their payrolls, who arrange the issuance of 1 million cards per month. They reportedly offer to issue cards to people with low credit standings, many of them juggling debt with multiple cards. No wonder the amount of money borrowed on cards soared to 23.9 trillion won in 2010, up 42 percent from the previous year.
The card industry’s trouble may not be as severe now as in 2003. But runaway competition for market share may result in a second card debt crisis. That is the reason why the regulators need to act resolutely against the illegal issuance of cards to persons with low credit standings.
Another problem with card debt is that it is growing faster than overall household loans. Outstanding card loans grew 19 percent to 27.9 trillion won in a year ending on Dec. 31 last year, compared with 6 percent for the total household debt.
Card debt cannot be allowed to increase at such a high rate when an average household already has 46.11 million won in debt, or nearly 150 percent of its disposable income. When awakened to this reality, card companies will have little reason to complain about the tightening of regulations on card issuances and cash advances.
Candlelight nightmare
Friday is the 24th anniversary of massive civil disobedience against a military-backed strongman. White-collar workers as well as student activists rose up against President Chun Doo-hwan, a former Army general, demanding that democracy be restored. Chun capitulated three weeks later, on June 29, promising a direct popular vote to elect the next president.
Students are set to stage another protest on Friday, this time demanding that university tuition fees be cut by half. Hard-pressed parents, advocacy groups and, of course, vote-besotted politicians are also expected to participate in a candlelight rally, one reminiscent of the huge 2008 nighttime gathering against beef imports from the United States ― undoubtedly a nightmare for President Lee Myung-bak’s administration.
Students’ demand to cut tuition fees by half was first espoused by the main opposition Democratic Party, which included it in its policy on the promotion of general welfare in the areas of education, medical care and child care. It did not take long before the ruling Grand National Party followed suit apparently with voter support in mind ahead of the parliamentary and presidential elections scheduled for next year.
But the problem with the rival political parties is that they have no concrete plan regarding how to finance the proposed across-the-board tuition cut. All that the opposition says is it can be done by saving from budget allocations, mending the tax system and improving welfare programs. No less disappointing is the ruling party, which has yet to decide which to propose: cutting tuition fees for all students or for students from needy families.
Given the nation’s limited budgetary resources, spending more on education means spending less on other areas. But can a greater subsidy for university education be justified just because student activists are better organized in their demands than physically disabled and other underprivileged people?
The Lee administration vows not to be swayed by the demand for a tuition cut and other populist general welfare programs. But it needs to build a public consensus on fiscal prudence if it wishes to hold fast in the face of mounting pressure from well-organized advocacy groups and the political community.
Students are set to stage another protest on Friday, this time demanding that university tuition fees be cut by half. Hard-pressed parents, advocacy groups and, of course, vote-besotted politicians are also expected to participate in a candlelight rally, one reminiscent of the huge 2008 nighttime gathering against beef imports from the United States ― undoubtedly a nightmare for President Lee Myung-bak’s administration.
Students’ demand to cut tuition fees by half was first espoused by the main opposition Democratic Party, which included it in its policy on the promotion of general welfare in the areas of education, medical care and child care. It did not take long before the ruling Grand National Party followed suit apparently with voter support in mind ahead of the parliamentary and presidential elections scheduled for next year.
But the problem with the rival political parties is that they have no concrete plan regarding how to finance the proposed across-the-board tuition cut. All that the opposition says is it can be done by saving from budget allocations, mending the tax system and improving welfare programs. No less disappointing is the ruling party, which has yet to decide which to propose: cutting tuition fees for all students or for students from needy families.
Given the nation’s limited budgetary resources, spending more on education means spending less on other areas. But can a greater subsidy for university education be justified just because student activists are better organized in their demands than physically disabled and other underprivileged people?
The Lee administration vows not to be swayed by the demand for a tuition cut and other populist general welfare programs. But it needs to build a public consensus on fiscal prudence if it wishes to hold fast in the face of mounting pressure from well-organized advocacy groups and the political community.
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