Financial authorities recently released the nation's credit card and cash-advance card debt statistics for last month to dispel any notion that Taiwan is heading into a consumer-credit bubble. The data was released at a time when investor confidence has been battered by the failure in bank consolidation, with the financial subindex falling 2.16 percent last week and a decline of 1.85 percent in the benchmark TAIEX.
Cash cards in Taiwan have emerged in the past five years as an alternative to credit cards and targetted at sub-prime customers. According to the Financial Supervisory Commission's Banking Bureau, credit-card debt reached NT$488.3 billion (US$14.53 billion) last month, while cash-card debt amounted to NT$315.2 billion.
As the credit and cash-card debt totaled NT$803.5 billion and accounted for less than 5 percent of the total NT$16.25 trillion in loans last month, this level of unsecured consumer debt is actually lower than South Korea's nearly 11 percent in 2002 -- when Seoul encouraged the growth of consumer credit to boost domestic demand but paid a heavy price in defaults.
Last month's figures, however, also showed a rise in the non-performing loan (NPL) ratio for both credit cards and cash cards. According to the bureau, the NPL ratio for credit cards reached 2.23 percent last month after August's 2.20 percent, while that of cash cards was 2.11 percent last month compared to August's 1.6 percent.
But the NPL ratios have also been affected signific-antly by changes in the financial authorities' bad-loan definition rules as well as changes in the charge-off policy by lenders who are now reviewing their credit policies and procedures, while writing off bad debts earlier than before.
The bureau's statistics also indicated a drop in the figures for bad loans written off last month. The write-off figure amounted to NT$4.367 billion for credit cards after NT$4.723 billion in the previous month, and to NT$2.072 billion for cash cards after NT$3.686 billion in August. The decline in bad loans written off last month suggested that the gross credit loss of those portfolios was lower than in the previous month.
It is clear that there has been no deterioration in the quality of these portfolios, let alone any sign to imply the emergence of a credit bubble like the one in South Korea in 2002.
Still, the government should proceed carefully with its plan to reschedule debt repayments for heavily indebted individuals, with debtors being offered reductions in loan interest and extended time to repay their debts. Banks currently charge an annual revolving rate of 18 percent to 20 percent, with the savings rate now standing at around 2 percent at major banks. If debtors were unable to pay their debts and declared bankruptcy, they would be shut out of legal financing but seek help from the underground market. This would only create more social problems.
The government should pay more attention to the ongoing cultural shift in Taiwan, where the younger generation is getting used to living on credit. Although an expanding consumer-credit market is generally positive for long-term economic development -- as it complements the nation's dependence on external demand and export markets -- financial institutions must be aware of the risks so that growth in consumer credit does not become excessive and create default problems for the entire nation.
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