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[Editorial] Card crisis deja vu

Korea suffered a severe credit card crisis in 2003 that not only disrupted the financial system but hit the real economy with a body blow. The crisis followed a massive credit card lending boom, which was fueled by the government’s misguided bid to boost consumption.

As the government eased regulations on the credit card business, card issuers pulled out all the stops to recruit new cardholders. They even solicited applicants on the streets and issued cards without screening their qualifications. New cardholders then recklessly took out card loans and cash advances to finance their consumption.

When the lending bubble burst, many credit card companies were on the brink of collapse under the weight of a huge amount of nonperforming loans. And several millions of people who carried multiple credit cards and rotated their use to juggle balances ended up in default.

While the memory of the fiasco is still fresh, the specter of another credit card crisis is looming large, as credit card issuance and card loans are surging in the midst of intensifying competition among card companies.

Last year, 12 million cards were newly issued, boosting the total number of credit cards issued to 116.6 million, above the previous peak of 104.8 million in 2002. Card loans jumped 33.3 percent from a year ago, totaling 23.9 trillion won.

What’s troubling is the surge in card issuance and card lending to people with low credit ratings. Last year, 1.04 million people with credit ratings below the sixth grade became new cardholders, more than 60 percent growth from a year ago.

Among people with grade seven or lower credit ratings, card loan users increased by more than 20 percent. Notably, their outstanding balances grew by some 20 percent in the final quarter of last year from a quarter earlier.

This suggests a worsening debt situation for low-income households as people tend to use card loans to repay their debts.

Card lending is expected to grow at a faster clip down the road as card companies step up marketing campaigns to expand this lucrative business. Card loans carry an annual interest rate of 15 to 25 percent, bringing more profits to card companies than fees on credit card purchases of goods and services.

Competition is heating up as banks are spinning off their card units into independent firms and new players are entering to get a slice of the action. Recently, SC First Bank said it would set up a joint venture credit card company with Homeplus, the second largest discount store chain in Korea. If this joint venture is launched, the number of monoline card companies will rise to eight, the same as that in 2003.

Compared with 2003, credit card issuers are in much better shape now. For instance, their debt to equity ratio improved from 1,594 percent in 2004 to 256 percent in 2010. The credit card delinquency rate also fell from 28.3 percent in 2003 to 1.8 percent last year.

But marketing costs of credit card companies have continued to rise. Between 2005 and 2010, their marketing expenses increased 19.5 percent a year on average. As competition is shifting into high gear, the upward curve in marketing costs is expected to get even steeper, hurting the balance sheets of card issuers.

Therefore, it is time for the financial regulator to come up with measures to curb excessive competition among card firms. It is necessary to ensure that they follow rules in recruiting cardholders and offering card loans. Scrutiny on their risk management systems needs to be stepped up to prevent them from lending loans excessively.

To head off another credit card crisis, the financial regulator should make sure that the rise in card lending does not result in a pickup in defaults and insolvency of card companies.
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