In December 2005, lawmakers approved the first reading of a bill to cap the maximum lending rates on credit and cash-card loans, saying this would ease the burden of debt on many young people. They stopped short of pushing forward with a third reading, however, after criticism that it was a step backward in the nation’s financial liberalization.
Three years later, the bill is back on the table. On Thursday, the legislature passed the first reading of similar legislation to lower the interest rates on revolving credit to 12.5 percent from the current ceiling of 20 percent stipulated in the Civil Code (民法). This time, they said, the measure was aimed at bringing loan rates in line with the central bank’s series of rate cuts while bringing benefits to cardholders.
As expected, banks voiced their concern that once the bill cleared the legislature — possibly within a month — it would hurt their credit card services and change the way they do business.
The Financial Supervisory Commission echoed these concerns, saying the rate-cap change raises the risk of banks withdrawing from the unsecured loan market, thereby preventing credit from flowing to borrowers who need it most.
Supporters of the measure, however, said that lower ceiling rates would help borrowers pay back late credit card payments. They argued that banks currently charge an annual revolving rate as high as 20 percent — way above the savings rate of less than 1 percent at major banks.
Arguments about the pros and cons of the rate-cap issue will likely continue in the days and weeks ahead. Underlining those arguments, however, are three basic facts that cannot be ignored: how fast the unsecured consumer loan business has grown in Taiwan; the strong consumer backlash against banks’ aggressive promotion of these credit payment tools; and bank concerns about profitability in the face of a fast deteriorating global financial environment.
Lawmakers may have the best intentions in pushing this legislation and have certainly won a measure of the public’s trust with their denouncement of bank exploitation of consumers. But their good intentions may come to nothing if the bill results in a decline in credit availability and higher fees for consumers.
For instance, smaller card-issuing banks may rethink the economics of engaging in unsecured consumer loans and withdraw from the market; bigger banks may decide to tighten up their credit criteria, making it hard for low-income households to obtain credit; and consumers who have good credit records may be charged higher rates once banks act to reflect the changes in their operational costs.
Despite the limitations of the credit card business, one thing is clear: Heavily indebted cardholders should bear responsibility for their own financial problems and learn how to keep up with the bills.
It is undeniable that the unsecured consumer loan business provides an easily accessible line of credit and is vital for low-income borrowers. No one would like to see debtors turn to loan sharks if they were shut out of legal financing, as this would only create more social problems. However, before deciding how they will extend fair and adequate protection to cardholders, lawmakers should consider the financial and socioeconomic implications.
The government and the legislature should work together to develop a mechanism that will provide incentives to banks in exchange for continued credit support for consumers at this most difficult time. Most importantly, this mechanism should be able to reflect how interest rates are charged in a more transparent and fair way, based on banks’ operational structure and costs, as well as cardholders’ credit scores.
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