Ebook Growing Asian credit card markets amid the global financial crisis
Against a background of the excessive US household indebtedness and ongoing global financial turmoil, consumer credit in Asia has grown significantly in recent years. While housing finance has so far dominated the lending to households and thus received the bulk of attention by policymakers and market players, unsecured personal lending has also expanded rapidly, albeit from a relatively low basis. With rising affluence, banks more oriented to the apparent higher risk-adjusted returns on household lending, and policymakers’ strategy to pursue less export-dependent growth, the credit card business has been one of the fastest-growing areas of unsecured retail finance in many Asian markets. Expanding credit card markets improve access to credit by a broader portion of the population and represent a more important source of profits for banks and other lenders. They may also affect the transmission of monetary policy and pose new challenges to financial stability.
The levels of outstanding credit card holdings and loans in Asia have not always converged smoothly to levels seen in mature markets. Rather, in this decade, Asia has witnessed cycles of marked credit card lending booms and busts in a number of its markets. This working paper takes stock of the recent experience in Asian credit card markets generally and examines three episodes of credit card lending distress in particular: Hong Kong SAR in 2002, Korea in 2003 and Taiwan, China (hereafter Taiwan) in 2006. Our analysis attempts to shed light on three questions. First, why did competition in a line of business that is well established elsewhere still from time to time lead to excessive credit card lending? Second, what was the character of the busts following the credit card lending booms? Third, what lessons can be learned from these episodes for both policymakers and market players? Answers to these questions will be especially valuable to a number of populous emerging Asian markets, such as China and India, where the credit card segment of retail finance is just starting to take off.
These three Asian episodes of credit card lending booms and busts seem to share several common elements in terms of their approximate causes, symptoms, dynamics and consequences: intensified competition in the high-yield, less prime, credit card lending business leading to reduced lending standards; a rapid build-up in household indebtedness; a disproportionate concentration of debt burdens among riskier cardholders; a significant and often sudden deterioration of asset quality; and a subsequent significant and prolonged contraction in credit card receivables. The bottom line is that, as consumer finance becomes an important part of Asia’s financial system, policymakers need to better understand the associated risks and be prepared to respond.
The working paper is partially based on Kang and Ma (2007) and structured as follows. Section 2 takes stock of the recent experience and discusses important trends in Asia’s credit card sector. Section 3 examines the three recent episodes of credit card lending distress in Asia and highlights some of the important common ingredients of these boom bust cycles. Section 4 undertakes a more detailed case study of the Korea’s distress episode during 2002-03 and examines issues related to rigidity of interest rates on credit card, adverse selection and factors influencing credit card asset quality, using firm-level data for Korea. Section 5 explores some of the possible policy lessons mainly from these three episodes of credit card lending distress in Asia, and Section 6 concludes.
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