A decade ago, domestic credit companies created a huge financial bubble by recklessly pursuing expansionism amid a loose regulatory environment.
When the bubble burst, card companies were all irreparably hurt. The government had to intervene to clean up the mess. Some were sold to new owners while others were bailed out by their parent companies. The turmoil rocked the nation’s entire economy.
Now, concern about another credit card bubble is growing as credit card firms are stepping up efforts to solicit new members and increase assets.
According to reports, card companies spent more than 600 billion won on marketing last year, topping the 477 billion won they spent in 2002, the year the bubble peaked.
As a result, the number of plastic cards issued by these companies totaled 122 million as of December, exceeding the 105 million in 2002.
Card companies have also expanded their assets. As of the end of 2011, their total assets reached 79.3 trillion won, larger than the 78.9 trillion won tallied in 2003.
The asset expansion raises a flag as it means credit card companies have increased card loans, which carry a higher risk of default than lending by commercial banks.
Outstanding credit card loans, including cash withdrawals, totaled 28.2 trillion won last year, up 300 billion won from a year earlier. The small increase was the result of the financial regulator’s crackdown on credit card lending.
Alarmed by a rapid asset growth of credit card companies, the financial watchdog last year toughened regulations on credit card loans and suspended card issuance to people with low credit ratings.
Without the crackdown, credit card lending would have increased more sharply as household demand for loans remained strong. To curb snowballing household debt, the regulator put a lid on banks’ lending to consumers. This made consumers turn to credit card companies as borrowing from them is easier than from a bank.
Despite the toughened regulations, credit card lending is on the rise. As card loans tend to be extended to consumers with low credit ratings, the delinquency ratio at credit card companies is also on the rise, fueling concern about another credit card crisis.
The default rate of the card firms reached 1.9 percent in December, about three times higher than the 0.67 percent for banks’ lending to households.
To prevent another credit card bubble from building, the financial watchdog needs to curb excessive competition among credit card companies. It also needs to encourage them to reduce their reliance on credit card lending.
