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Asia Looks More Before It Lends
Credit-Card Defaults Spur Finance Companies to Do More Research on Borrowers
By PHILLIP DAY
Staff Reporter of THE WALL STREET JOURNAL
As South Korea racked up early successes in boosting its economy by offering consumers easy credit, much of the rest of Asia raced after it.
Now those countries are scrambling to avoid Seoul's fate. Facing a wave of debt defaults and personal bankruptcies, they are moving to tighten borrowing limits and force credit-card companies to be more careful about their lending. One important new weapon: credit bureaus, through which banks and card companies share information about borrowers, finally are starting to catch on.
But reversing entrenched business practices will take time. Credit-card companies in Asia have had a "land-grab mentality when it comes to attracting customers," said Andre Bailey, a senior associate at McKinsey in Seoul who co-wrote a study on the issue last year.
That poses risks for Asian economies by once again threatening the health of their banks, most of which have yet to fully recover from the corporate-debt crash of 1997-98 that accompanied the Asian financial crisis. For an example of the potential for damage, all that other Asian countries have to do is look at South Korea, where the bursting of the consumer-debt bubble has imperiled banks and is damping economic growth.
Credit bureaus -- a major part of the financial-safety system in the West -- are at best playing catch-up, and banks and card companies often still operate without a true picture of their customers. In most places, credit bureaus have been operating just one year or less. Only recently have some jurisdictions, such as Hong Kong and Singapore, started sharing information on borrowers that goes beyond whether they have had a problem with a loan. So-called positive-intelligence sharing does more than note that an applicant for a new card defaulted on a loan at another bank, by also including accounts and loans they hold elsewhere.
Without good positive intelligence, consumers running into debt troubles can get new cards and take out more loans, "floating the balances they owe from one card to another until they go bust, or until somebody finally gets wise to them," said Debbie Schuler, a senior credit officer at Moody's Investors Service in Singapore.
That was one of the problems Hong Kong faced as it was hit with 25,000 personal bankruptcies last year, or 28 times as many as it had during 1998. Because banks and credit-card companies didn't have the full picture of their clients' debts, total debts were allowed to climb much higher before the final crash. In the U.S., bankrupt debtors owe on average 21 times their monthly income before they hit the wall; in Hong Kong, the average is 42 times, according to the McKinsey study.
Hong Kong has made strides since positive-intelligence sharing was instituted during August, though there are critical limits on what banks can find out. Banks can only ask for credit reports when customers apply for new loans, so there could be many problem borrowers racking up debt. Still, the monthly growth in bankruptcies has tapered off, and 2003 had slightly fewer bankruptcies in Hong Kong than the year before. Banks have tightened some of their policies for fear of generating new bad loans. "They've clamped down pretty hard in a short period of time," Ms. Schuler said.
Though the rest of Asia will likely fare better than South Korea, some dangerous practices continue. In developed markets such as Taiwan and Hong Kong, lenders are offering new kinds of credit as the numbers of cards in circulation peaks. And the untapped potential of East Asia's most-populous countries -- China and Indonesia -- likely will be the next battleground for customers.
"It's very easy to get into consumer lending," said Ridha Wirakusumah, president of GE Consumer Finance Asia. "But to be able to manage thousands or millions of customers, that's when [some banks and card companies in Asia] get into trouble."
In Taiwan, lenders have been moving into cash cards, which have similar charges to credit cards but offer instant cash at bank machines. Borrowers may pay as little as 2% of their balance outstanding every month. Banks have moved into this market as credit cards have saturated the country.
Losses from cash cards, with their revolving credit, can take as long as two years or more to surface, according to a report last month from Taiwan Rating Corp., a local partner of Standard & Poor's.
Meanwhile, Taiwan authorities have tried to force lenders to tighten credit-card loans. Each credit-card user in Taiwan has an average of eight cards, four of them in active use, Taiwan's bank regulator said. Late last year, the agency forced banks to establish reserves to cover credit-card debt that is more than six months delinquent and told banks to separate their credit-card operations so bad loans aren't being disguised or offset by good loans from other operations.
In China, where the population of 1.3 billion holds just one million credit cards, the government is pushing banks to issue cards and shopkeepers to accept them. There are signs China recognizes the need to avoid some of the past mistakes made in places such as South Korea. Shanghai, for example, has a credit bureau that appears to be working well, analysts said.
China has adopted some questionable South Korean tactics. City governments in Shanghai and Beijing are offering "lucky draw" prizes to consumers who use credit cards to make purchases, a tactic used by South Korea when it first started boosting the use of cards during 1999.
Write to Phillip Day at phil.day@wsj.com
Updated January 20, 2004
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