Overall Prohibition of New Membership for Card Companies with over 15% of default rate

From next April, the credit card companies which have over 10% of default rate, will be designated as an insolvent financial institute and will be given disadvantages.

Also, all card companies will know information on default card amounts of over KRW 100,000. The usable limit of cash service will be included in the customer credit information provided to financial institutions by Korea Federation of Banks.

Financial Supervisory Commission(FSC) and the Financial Supervisory Service (FSS) announced on November 19, “We will take measures and execute gradually to increase a strength for restraining the household loans of credit card companies.

FSS will frame a plan to strengthen the strength supervision basis to prevent credit card companies to be insolvent owing to a sharp increase of cash loans and default rate.

In accordance with measures, banks and credit card companies must accumulate 1% of bad debt provisions for the cash service limit without membership. So, from next year, the net profits of domestic card companies will decrease by KRW 400 billion.

From next April, FSS will determine the measure under instruction of management improvement when the default bonds rate of over one month is larger than 10%, the demand measure of management improvement when the default rate is larger than 15% and a deficit is made, and the order of management improvement such as the business suspension, when an adjusted net worth ratio is less than 2%.

Approaching the requirement of management improvement prohibits the new membership and fund borrowings.

As of the end of September, the default rate (over 1 month default bonds) reaches 12.2% for Korea Exchange Bank Credit Service, 9.1% for Tong Yang Card and 7.3% for Kookmin Card.

Lee Du-Hyeong, head of Oversight Policy 2, FSC said, “We determined to include a settlement amount of corporate card on affiliates in a credit limit(within equities) to prevent card companies to decrease the cash loans by an expedient method.”

FSS will restrict the service of new cash loans for card companies which don’t decrease a weight of cash loans, and start the special investigation for all 26 card companies from next month to early months of next year.

Dong-Won Kim daviskim@donga.com