Mainland credit card debt surges
Daniel Ren in Shanghai
Unpaid credit card debt on the mainland has surged 126.5 per cent this year, prompting Beijing to warn banks to ease back on aggressive marketing tactics that encourage people to sign up for new cards.
By the end of September, 7.43 billion yuan (HK$8.43 billion) of credit card debt was at least six months overdue, the People's Bank of China said yesterday, adding 'bad-debt problems should be closely watched'.
Mainland banks started to aggressively market high-profit credit-cards in the early 2000s as they sought to diversify income. Beijing initially encouraged banks to expand the business amid a belief that it would boost retail sales. That strategy appears to have backfired, with the credit card binge by mainland consumers now reminiscent of similar problems in developed countries.
The overdue amount represents 3.4 per cent of the total outstanding credit card debt, 0.3 percentage points higher than at the end of the second quarter this year.
'The default rate is set to jump since all banks are gearing up to expand the high-yield, while risky, business,' Haitong Securities analyst She Minhua said. 'The rapid pace of credit-card issuance will continue as banks vie for a big market share.'
Mainland banks had issued 175 million credit cards as of September. In the first nine months of the year, spending using credit cards jumped 39.7 per cent from a year ago to 1.24 trillion yuan.
Many mainland banks offer gifts such as toys and daily necessities to encourage people to sign up for credit cards. Some of banks also use third-party companies to issue cards regardless of an applicants' credit-worthiness.
In September, the Shanghai bureau of the China Banking Regulatory Commission ordered local banks to stop outsourcing the job of signing up new card holders to outside firms.
Li Jinhui, an assistant president at China Merchants Bank's credit card unit, said the hefty rise in the default rate wouldn't deter his company and other rivals from further exploring the credit card business. 'Competition is getting fierce and the problem is not as severe as people think. Scale holds the key to the success of the credit card business,' Li said.
On the mainland, credit card penetration stood at 0.13 cards per person by the end of September, far below the US where more than 300 million people were using 1.5 billion cards in 2006, according to the US Census Bureau.
In the US, the credit card charge-off rate stood at 11.49 per cent in July, according to Moody's Investors Service. The charge-off rate is the amount written off as uncollectible.
Rising credit card delinquencies have added pressure on mainland banks, which have been forced by the banking regulator to reserve an extra 70 billion yuan to cover bad debts arising from a lending spree earlier this year. Mainland-based banks had outstanding bad loans totalling 443.6 billion yuan at the end of June, and the regulatory commission has required them to raise their bad-loan reserve ratio to 150 per cent at the end of the year, from 134.3 per cent.
Analysts said the banks could digest the 3.4 per cent in bad credit card debts, but they warned the thorny issue would spin out of control if the reckless card issuance continued.
'A collapse of credit card business would undermine the banking and retail sectors, and it would even badly affect the economy,' She said.
Currently, most mainland banks' credit card units are operating at a loss due to small customer bases.
China Minsheng Banking Corp said earlier this year it aimed to double the number of credit card holders in three years, eying a circulation of 12 million.
'Reckless lending will eventually cost the banks if they don't refrain from issuing credit cards freely,' said Jin Ling, an Orient Securities analyst.