When lawmakers proposed to pass a law to cap the maximum lending rates on credit and cash-card loans last week, they declared the planned legislation a move that would ease the burden of debt faced by many of the nation's young people.
While they stopped short of pushing forward with a third reading of the bill on Friday -- after criticism it was a step backward in the nation's financial liberalization -- lawmakers demanded that banks and the banking regulator come up with a more comprehensive negotiation mechanism within a week.
Measures were to include tiered pricing for customers with different credit conditions and lower interest rates for borrowers who are deep in debt, as well as stricter supervisory measures for card issuers.
The lawmakers' move to shelve the rate caps immediately received a positive reaction from the markets, helping financial stocks rebound 0.5 percent after they had fallen 3.3 percent on Thursday and 1.2 percent on Wednesday. While pundits said the delay should help to maintain the banking industry's stability, the rate-cap issue reflects how fast loans have developed in Taiwan in recent years as banks move aggressively to promote the use of various credit payment tools.
However, after failing to raise consumer awareness of the risks associated with borrowing, the nation's banks have ended up seeing the number of consumers defaulting on repayments shoot through the roof. According to the latest figures, some 400,000 people owe money on credit cards, cash cards and other unsecured loans. At the same time, the nation's revolving loans surged to NT$1.15 trillion (US$34.33 billion) as of October this year from NT$480.5 billion in 2000. This is an indication that the nation's banks have overstepped the mark and need to strengthen their lending criteria.
Lawmakers may have had good intentions with this legislation. When they saw that one-third of low-income earners were spending more than 40 percent of their income paying off debts, they accused card-issuers of exploiting high revolving rates for huge profits. But their cure for this illness is totally inappropriate.
The introduction of rate caps will only produce more serious financial, social and economic consequences. For a start, jobs will be lost as the smaller card-issuing banks will begin to leave the sector; other banks will be prompted to tighten credit-issuing criteria and this will make it hard for individuals on low incomes to get credit. Moreover, people will still get into trouble after rates are capped, as they will be forced to turn to illegal loan sharks.
In a report published last week, Jesse Wang (
The nation's growing debt burden is about much more than just interest rates. Before offering any remedies, politicians should first check whether Taiwan's banking sector is still so highly regulated that the banks have no other diversification options than to offer cash-cards. And if the growth in consumer loans has happened as a result of shrinking demand for domestic investment funds by corporations, then they should examine why this is and seek ways of changing the situation. They should come clean on these issues.
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