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Crisis on the cards?
(Shanghai Star)
Updated: 2004-03-26 08:43

Last year was a contradictory year as far as credit cards were concerned in two Asian countries.

In South Korea, the credit card crisis gave the industry a big headache, with credit card firms posting a combined deficit of US$9 billion due to a surge in bad debts and massive loss provisions.

But in China the credit card business seems to have finally taken off, with several domestic banks launching credit card services in major cities.

Will China repeat the South Korean story?

The catch-me-if-you-can attitude of many South Korean card users has set off alarm bells among Chinese card issuers and regulators.

The Shanghai version of Frank Abagnale Jr. - the US fraudster immortalized in a recent blockbuster movie - was less lucky than the real one. He was caught when attempting to obtain a credit card using a fake ID card. However, the police were stunned to find that he already had six credit cards with the same bank, issued on the basis of his real identification. Even worse, he also held several credit cards from other banks and overdrew on them extravagantly.

The China Banking Regulatory Commission Shanghai Bureau soon issued a letter to all commercial banks, warning of possible risks that could follow from issuing numerous credit lines to the same customer.

"It reflects the flaws in the banks' credit card businesses," said the bureau in a statement.

In the light of such cases and what happened in South Korea, regulators have been worried that commercial banks are rushing too quickly into the credit card business without first putting in place adequate risk management controls, creating a potential for future bad loans.

Risk management

Analysts point out that domestic banks have quickened their steps to increase their market share since the second half of last year, while putting risk management aside.

Without a proper assessment system, some banks have failed to monitor the banking relationships of their customers and then granted them excessive credit lines.

Meanwhile, in order to issue more cards, some banks have allowed branches to issue cards, or even outsourced their sales business, thus making it possible for a client to obtain more than one credit card by applying to a number of different outlets.

Many applicants find the application procedures have become more flexible than before. After filling in a form, some people quickly get a card, with a credit line of 5,000 yuan (US$607).

"It is understandable that a bank may adopt different strategies in different development phases," commented one analyst.

However, business insiders also point out the importance of risk management of the business.

"It is critical to ensure the overall health of the banking industry. The profitability and risk management in the light of the market should be well balanced," said Soomee Har, head of Chinese consumer banking at Standard Chartered Bank.

She said a structured approach should be taken before lending to a customer, making use of the credit bureau, the bank's internal database and checks on appointment records and residential information.

"Then we can make an informed decision about a customer's creditworthiness," she said.

But she doesn't worry China will repeat the situation in South Korea, which saw a rapid boom in consumer lending followed by a huge surge in delinquencies as over-indebted consumers found themselves unable to pay back loans.

South Korea's credit market is much bigger than China's - about 50 per cent of GDP, compared with less than 1 per cent in China.

By the end of June last year, China had issued over 569 million bank cards. The 2.5 million "credit" cards in use are effectively only debit cards with an overdraft facility. The number of genuine credit cards is about 2 million, less than 0.4 per cent of all bank cards.

In the first six months of last year, credit card payments accounted for no more than 1 per cent of total consumer spending in China, compared with an average 19.6 per cent in the US and 12.6 per cent in South Korea.

"There is a lot of room to grow," she said.

What really makes China different from South Korea is a national credit bureau, which is now taking shape.

Har said a solid credit bureau would take China in a different direction to South Korea.

"Despite its very large credit market, the use and development of a credit bureau in South Korea only began recently," she noted.

"You should always have the right infrastructure in place before the industry gets too big. So we will not have the same problem the South Koreans did with a huge nonperforming loans (NPL) problem," she added.

Credit database

At a credit forum hosted by Standard Chartered in South Korea early this month, Wan Cunzhi, deputy director of the National Credit Administration Bureau under the People's Bank of China (PBOC), told the audience that China was planning a national credit bureau.

Shanghai has led other parts of China by establishing its own credit bureau four years ago.

Shanghai Credit Information Services Co Ltd (SCIS) set up its Consumer Credit Database System (CCDS) in response to the growing demand for consumer credit facilities in China.

Credit information was fed into the database from the 15 participating domestic banks, China Mobile, China Unicom and some local gas and water suppliers.

Information on 3.7 million people had been fed into the database by the end of last year, compared with 1.1 million when it first opened in 2000.

"It means that we cover about half of the population with consuming power," said Yu Wenqian, spokeswoman for SCIS.

Several overseas banks, including HSBC, Citibank and Standard Chartered have signed agreements with SCIS, however, they still have no access to the database yet.

The system enables banks to assess their customers credit records thus assess the creditworthiness of their customers for credit cards as well as for personal loans such as mortgages.

And the banks have learned to use the credit bureau.

"The request for credit references have been increasing since we issued our first file in 2000. We now issue an average of 4,000 credit reports per day, most following inquiries by commercial banks, compared with 50 a day four years ago," she added.

To Standard Chartered's Har, a national credit system is critical for the healthy development of China's consumer credit system.

"As the credit market grows, the government is putting together the right infrastructure, such as the credit bureau, to ensure that we are growing and sustaining that growth with a robust credit decision-making process," she said.

Standard Chartered, which has submitted an application to issue a foreign currency credit card, plans to issue its own Renminbi credit card when foreign banks are allowed to do so.

"We are very interested in doing our best to help the leaders in China as they embark on the development of the national credit bureau," said Har.

It is reported that the PBOC is looking to introduce a scheme in the next two to three years that would link all the credit bureaus nationally.

"The model of the national system hasn't been decided yet, I hope SCIS's experience will be helpful," said Yu.

No matter how, China is developing the infrastructure of a credit bureau ahead of the credit card market, "which is the right order," according to Har.

"Based on our research and understanding of the market, Chinese have been embracing their traditional values, which means only spending what they have earned," she said.

To spend beyond one's earning capacity is still rare in China, so borrowing behaviour is still emerging.

"My personal view is that it will probably take another five to 10 years before it is fully developed, as in Hong Kong or Singapore, where people use credit to buy things they could not otherwise afford," she said.

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