Planned government measures aimed at assisting credit card holders in default may cause more harm than good to the banking sector, Taiwan Ratings Corp warned yesterday.
Legislators, facing public pressure to ease debt burden on card holders, are proposing measures cutting by half the maximum annual rate of 20 percent that banks charge on card lending, and amending the bankruptcy law to favor debtors.
Taiwan Ratings, which is a unit of Standard and Poor's, said a drastic reduction in the rate cap, together with a dramatic increase in the number of personal bankruptcies, is likely to increase industry risk.
This would put heavy pressure on the modest profitability in the sector. Last year, the return on average assets in the sector was 0.3 percent.
Taiwan's ballooning credit card market has banks bracing themselves for another round of bad loan write-offs which is expected to peak over the next three months.
The write-offs are expected after American Express sounded alarm bells last month, suspending the issue of all new credit cards after its non-performing loan ratio caused a bout of jitters and spiralled.
Despite a cabinet objection, opposition parties are pressing for the controversial rate cap.
Taiwan Ratings said if the proposed measures are implemented, banks with large exposure to consumer lending or other high-yield products are likely to see a contraction in their business.
Their credit ratings would likely be negatively affected.
The measures might benefit indebted consumers, but would likely force banks to halt unsecured consumer lending, their most profitable business line, it said.
If taken to the extreme, the measures could also have a negative impact on auto loans, small and mid-size enterprise lending, equipment leasing, and other businesses, it added.
Taiwan Ratings said if these sources of profit dry up, banking profits would suffer unless they could charge healthier lending rates on corporate loans, lower their funding costs, or generate new revenue.
These were, it said, difficult initiatives to implement in the face of strong competition.