The legislature’s proposal to lower the ceiling on interest rates for revolving credit will reverse the nation’s past efforts to internationalize its banking sector and retard the market mechanism, pundits said yesterday.
“We think the government should respect market forces without putting its hands [into the credit card market],” a member of the European Chamber of Commerce Taipei’s (ECCT) banking committee, who requested anonymity, said by telephone yesterday, adding that the chamber would soon talk to the Financial Supervisory Commission about possible remedies.
“Forcing banks to charge lower credit card rates may be a dangerous path because it obstructs market forces,” Tine Olsen, an economist at Moody’s Economy.com, said yesterday in an e-mail to the Taipei Times.
Pending final reading, the legislature on Thursday decided to cut the statutory 20 percent cap on the rate to 9 percent above the central bank’s interest rate for short-term lending without collateral, or 12.5 percent at the current level.
Should the bill be written into law next month, Taiwan will have the lowest cap on revolving interest rates among the few countries in the world that impose a similar cap, they said.
In Hong Kong and South Korea, the top rate is currently set at 48 percent and 49 percent respectively, Jonathan Lee (李信佳), senior director of financial institutions group at Fitch Ratings Ltd Taiwan branch, said yesterday.
In Singapore, the top rate is at 24 percent, another foreign bank executive said.
Lee said that the legislature has simplified the cost structure for card issuers and largely ignored their rising operating and default risk cost amid poor credit conditions.
Card issuers, without taking profit into consideration, need at least 15 percent to cover their costs from granting unsecured loans to risky borrowers — 8 percent for operating and personnel costs, 6 percent for default risk and 1 percent for capital cost after the central bank’s series of interest rate cuts, he said.
He also warned that “a small wave of defaults on the nation’s unsecured loans may occur” once some borrowers are rejected by banks for loans to repay their other debts.
The legislature’s policy may also cause interest rates to climb amid rising inflationary pressures.
The Bankers Association of ROC (銀行公會) also expressed concern over the legislature’s drastic rate cut.
Justin Lee (李懿哲), director of the association’s credit-card committee, said that he hoped the legislature would reconsider the rate policy, “which otherwise will hurt the local banking sector badly.”
To respond to the society’s expectations, Lee urged the legislature to assess the possibility of creating a risk-based adjustable-rate mechanism similar to that of adjustable-rate mortgages (ARMs) on the precondition that the statutory 20 percent cap remain unchanged.
“It’s more of a matter of rising risk than a matter of declining interest rates,” he said.
Details of such an adjustable-rate mechanism however required further deliberations, he said.
Local media reported yesterday that the Cabinet had previously hoped the legislature would set the top rate at 12 percent above the central bank’s short-term lending rate, instead of 9 percent.
FSC Chief Secretary Lu Ting-chieh (盧廷劼) yesterday said that whether the fixed rate was set at 9 percent or 12 percent wasn’t important.
It was more important that banks be allowed the flexibility to float their rates, which the legislature’s decision has obviously choked off, he said.
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