Regulators ban use of credit cards to pay bank loans

Taiwan ordered lenders to ban customers from repaying bank loans with credit cards in a move to control debt expansion in consumer banking.

The decision by the Financial Supervisory Commission would stop the shift of risk related to credit-card debt, which is considered part of consumer spending, to bank loans, which are not, the commission said in a recent letter to banks. The commission oversees financial markets, banking and insurance.

"Using credit cards to repay bank loans will speed up cumulative debt for individuals," Lin Tung-liang (林棟樑), a director of the commission's banking department, said in a phone interview. "So far, the overdue loan ratio of credit cards is still under control at around 2 percent. We want to control it before it's too late."

Taiwan is seeking to avoid a repeat of the credit-card crisis that has left one in 13 South Koreans unable to pay their bills, Lin said.

Defaults in Korea pushed LG Card Co and two other card issuers to the brink of bankruptcy, requiring bailouts from lenders or affiliates.

South Koreans had 4.5 trillion won (US$3.8 billion) of overdue credit-card bills at the end of June, a debt mountain that's blamed for losses at banks and sluggish consumer spending.

"The commission's action is a positive move to control default risk," said Parker Wu (吳年恭), a fund manager at Shinkong Investment Trust Co (新光投信). "Using the high-cost credit cards to repay bank loans will easily result in payment defaults."

Taiwan had about 41 million bank credit cards at the end of June, or almost two cards for every person, according to the commission statistics.

Consumers used credit cards to borrow NT$90.3 billion of cash from banks in the first half of this year, up 12 percent from a year earlier, the commission said. As of June, credit card users had a revolving balance of NT$452 billion, up 31 percent from a year earlier.

Wu said most credit cards charge an annual revolving rate of 18 percent to 19 percent, compared with less than 5 percent on mortgage loans and less than 10 percent in short-term loans.

Banks have no right to question how customers use money borrow through credit cards, but Lin said banks can monitor the use of the money borrowed through revolving balances and control credit card usage.