Editorial: No free lunch for bad debtors

Mon, Dec 25, 2006 - Page 8

As the year draws to an end, it is clear that bad consumer loans were among the most important problems that the banking sector faced. Industry consolidation cases and corporate default probes will also be remembered as issues over which no small amount of ink was spilled.

Instead of contributing to the nation's economy, the banking sector may actually have dented it. So much so that rumors circulated that some banks planned to drop their year-end parties due to increasing debt and dropping revenues.

After learning that some overstretched borrowers had committed suicide because of their large credit card or cash card debts, banks and the Financial Supervisory Commission initiated in April a card-debt negotiation mechanism for cardholders which allowed flexible pricing on debt payback and other beneficial conditions for unemployed debtors and low-income debtors.

For a while, as banks strengthened their risk management procedures and borrowers learned how to use the various credit reimbursement tools at their disposal, the problem seemed to have come under control. The commission's latest data shows that the number of credit cards in circulation dropped 14.75 percent from a year ago to 39 million cards in October. The number of cash cards fell to 2.3 million in October, down 37.33 percent from a year ago.

Stock of credit card debt declined by 25.39 percent year-on-year to NT$367.8 billion (US$11.29 billion) for credit card usage, while total cash card debt shrank by 28.12 percent to NT$193.9 billion from a year earlier.

Some said the consumer credit crisis could, at the earliest, bottom out in the second quarter of next year. But whether the sector will start to show healthy growth in the coming year will depend on key consumer debt legislation which will be reviewed by lawmakers this week.

Late last year, lawmakers managed to pass a bill to cap the maximum lending rates on consumer loans, but stopped short of pushing forward with a third reading of the proposal after academics and investors said that it represented a step backward in the nation's financial liberalization.

This week, three versions of the proposed personal bankruptcy legislation are expected to be brought to a vote in the legislature. These drafts -- including a consumer debt resolution act drafted by the Judicial Yuan -- will remind us once again of the importance of seeking a balance between helping individuals who cannot repay their personal debt and must therefore seek bankruptcy protection and ensuring the banking sector's stability and long-term competitiveness.

Taking the draft legislation's impact on society, the economy and the nation's reputation into full account, the joint banking committee of the American and European Chambers of Commerce earlier this year warned that proper conditions, limits and safeguards must be adopted to prevent a possible "moral hazard" situation where some debtors may try to avoid paybacks through the projected personal bankruptcy legislation.

These conditions, limits and safeguards -- such as proper safeguards against possible abuse and independent debt counseling for bankruptcy seekers -- will amount to nothing if they are not seen as an instrument of last resort.

To establish the nation's first consumer insolvency regime, lawmakers will need to approach the legislation with care. As for credit abusers, some limits should be made on their lifestyles and measures taken against overspending.

There is no such thing as a free lunch. Ultimately, debtors have to pay.