| |
Asia's Hello Kitty consumers lap up
credit
By John Mulcahy
 In
1998 South Koreans lined up to donate their gold jewelry
in a profound display of voluntary economic sacrifice.
Sacrifice seems no longer the order of the day. The
country is suddenly reeling from a consumer credit
binge, and nor is it alone. South Korea is the champion
of credit-card growth, but double-digit annual growth in
credit-card receivables has been recorded in Thailand,
Taiwan, India, Singapore, Hong Kong and Malaysia over
the past five years.
For generations, Asians
have been the world's most thrifty savers, with an
average savings rate across Asia outside Japan of 31.6
percent of gross domestic product (GDP) in 2002,
according to the Asian Development Bank (ADB). As late
as 1997, the Chinese were saving an astonishing 75
percent of their total income. The only countries in
Asia with savings rates below 20 percent are Pakistan,
at 12.7 percent of GDP, and the Philippines, at 16.8
percent.
The implications of the current rampant
consumerism are unknown, but they could be cause for
serious concern. Growth in credit-card usage everywhere
in Asia has been consistently outstripping GDP growth
and, according to consultants McKinsey, the growth in
credit cards has been accompanied by rapid growth in
defaults. In Hong Kong, personal bankruptcy has become a
recognizable household finance strategy, with personal
bankruptcies in 2002 more than 28 times the number in
1998. Japanese-owned AEON famously used the Hello Kitty
brand to expand its market penetration. These cards,
issued almost instantaneously, allowed AEON to leapfrog
many of its competitors' market share. In Thailand, GE
Capital used a different ploy, offering private-label
credit cards, giving it access-by-proxy to a huge
customer base.
It appeared from these successes
that credit cards were an easy way to make money.
Younger consumers, unconstrained by their parents'
traditional aversion to risk and credit, and driven by
peer pressure to accelerate consumption, have changed
the landscape for credit-card issuers. But the headaches
from the binge are painful, and there is no quick fix.
Legal systems are not equipped to deal with the
phenomenon of consumer-credit delinquency, and there is
a limited culture of personal bankruptcy.
A
McKinsey report advocates the establishment of regional
credit bureaus, which are currently used in Asia only to
share negative information, such as late bill payments
and loan defaults. "But for bureaus to make a true
assessment of a borrower's risk, they must also have
access to positive information, including current
outstanding loans, available credit limits and payment
histories," McKinsey says.
The firm makes the
point that banks can limit the total debt of individuals
to a reasonable multiple of their incomes by sharing
information about existing loans through a bureau. But
"if some institutions fail to work with it, individuals
can always exceed that limit by borrowing from those
that don't participate".
In a way, Asia's
wayward private borrowers can be understood, if not
forgiven. As the dust settles on the Asian financial
crisis and attention is turned to the next growth phase,
the stock of non-performing loans is in excess of US$2
trillion. This burden on the region's banks remains a
ticking time bomb, as in many cases the banks have
resumed lending without adequately dealing with the gaps
on their balance sheets.
Perhaps the only good
news on the consumer-credit front is the fact that China
has not yet embraced this form of lending. China is
still struggling to cope with its huge corporate-debt
problem, and compounding this with a consumer-credit
crisis would pose serious questions about China's
capacity to deal with its overall credit problems. Not
that China's entrepreneurs are unaware of the
opportunities in the credit-card market, of course. This
year it was reported that a fake-credit-card ring had
been cracked, as police seized more than 17,000
MasterCard and Visa credit cards. It is estimated that
fewer than 5 percent of court judgments in China are
enforced, and these are all corporate borrowers. There
is no tradition, at least in the past 50 years, of banks
using courts to enforced credit agreements.
Debtors throughout Asia have exploited weak
legal systems. Thailand's antiquated system, requiring
creditors to prove insolvency before enforcing
arbitration, has seriously delayed debt consolidation
and workouts.
The consumer-credit binge runs
contrary to long-established conventional wisdom, which
states that Asian individuals are risk-averse, and
prefer cash to credit. They have learned very quickly,
and official data seem to support the notion that Asian
consumers are more wary of credit than their US
counterparts. Up to 2001 there were no Asian countries
with credit-card penetration rates approaching the 82
percent of the United States. By 2003, however, both
South Korea and Hong Kong reported rates of credit-card
use similar to the US, while credit-card usage has
increased quickly throughout the region.
In
South Korea, Standard Chartered's head of
the consumer financing sector, in announcing the
bank's intention to offer consumer banking services,
said recently that the Korean market was "very
attractive" because it represented 50 percent of Asia's
consumer-loan growth. However, South Korea's
consumer-debt defaults have been rising, due partly to
the overall slowdown in the economy, but also to the
tighter regulation, ending the practice of "card
kiting", where holders of multiple credit cards use one
card to repay outstanding debt on another.
South
Korea's consumer boom, and indeed growth in consumption
throughout Asia, has been seen as the solution to slower
global growth. But aggressive marketing by banks and
other financial institutions, desperate to replace
corporate business lost to equity and other capital
sources, has created the two-edged sword of consumer
credit.
An ADB report notes that South Korea's
"household debt surged to three-quarters of GDP as at
end-2002, from less than half in 1999". Thailand's rapid
expansion in private investment, according to the ADB
(13.3 percent in 2002 from 4.7 percent the previous
year), "appears to be related to housing construction
rather than productive capacity".
It could be
argued, of course, that after the investment binge of
the 1990s, driven by easy capital and cheap credit, the
last thing Thailand or its Asian neighbors need is more
capacity. But the question is whether the excessive
expansion of consumer credit will come back to haunt
Asia, as its corporate-credit binge did five years ago.
The end of Asia's asset-price inflation boom in
1997 produced a commercial-credit crisis that shattered
the region's reputation for savings-driven economic
expansion. Non-performing loans as a proportion of GDP
among Asian countries range from around 10 percent in
the Philippines to well over 50 percent in China. In
Thailand and Malaysia, bad debts represent more than 40
percent of GDP.
Traditionally, Asian banks
accepted deposits from the region's thrifty individual
depositors, lending the funds to corporate borrowers
with little apparent regard for effective risk
management. The collapse of corporate balance sheets
across the region after the 1997-98 crisis persuaded the
banks to shift their lending focus to consumers.
Described more than a year ago as "the single most
powerful theme in Asian financial services", consumer
lending has been the flavor of the year in 2002 and
2003. But these institutions have been discovering that
the high rewards of consumer lending (gross margins on
credit-card lending are 5 percent-plus) are accompanied
by extremely high risk.
Private-consumption
spending is cited as a key driver of economic growth in
Thailand, Indonesia, Malaysia and other Asian countries.
Aggressive pump-priming through monetary-policy measures
(interest-rate reductions) and in some cases relaxation
of consumer-credit controls have added an official
imprimatur to the banks' inclination to explore retail
markets as an alternative to the sluggish corporate
credit environment.
The ADB notes that the
strong growth in Indonesia's bank credit since 2002 has
been due almost entirely to the consumer sector. The
banks' loan-deposit ratio has risen sharply over that
time, although it is still comparatively low at 45
percent. This high level of liquidity in the banking
system reflected in the low loan-deposit ratio is
reflected in high capital adequacy ratios (more than 20
percent), but the growth in consumer credit in Indonesia
suggests the risks that have manifested themselves in
South Korea and Hong Kong may in due course be repeated
elsewhere in the region.
The pace of growth in
household lending suggests it is likely there will be
such negative consequences in due course. Up to the end
of the 1990s, household credit represented 25-30 percent
of bank lending. It is now estimated that this ratio has
risen to 40 percent, and there is every sign it will
continue to expand.
The consequences of this
policy shift, without adequate credit controls, are
already evident. In a single year - 2001-02 - default
rates reported by South Korean banks on bank-issued
credit cards rose to 12.2 percent from 7.3 percent. To
put that into perspective, the increase in the default
rate (4.9 percentage points) will have wiped out the
profits on the credit-card business for these banks. In
Hong Kong, where consumers have battled against
collapsing asset prices and deflation for the past five
years, the charge-off ratio for credit cards is about 12
percent. By comparison, the charge-off rate in the
United States is about 7.5 percent.
It has long
been accepted that there is a direct correlation between
the delinquency rate of credit-card debt and the growth
in volume. In other words, the sine qua non is
that the more people who are issued credit cards, the
greater the default ratio. It is inconceivable that the
banks so aggressively issuing credit cards - in several
markets credit cards are sent unsolicited to prospective
holders - are unaware of this obvious link. It is simply
a restatement of the Law of Diminishing Returns. And yet
in Hong Kong, one of the more sophisticated banking
markets in Asia, consumer bankrupts typically owe 42
times their monthly income in unsecured debt, according
to McKinsey, double the debt of the average consumer
bankrupt in the United States.
As Asia finally
starts its recovery from the deep and prolonged crisis
of the late 1990s, the South Korean example shows that
there may be another credit crunch around the corner -
and this time it may be even more difficult to extract
payment from the defaulters.
(Copyright 2003
Asia Times Online Co, Ltd. All rights reserved. Please
contact content@atimes.com for
information on our sales and syndication policies.)
|
| |
|
|
 |
|
