Heralded Credit Card Disaster

Only a year ago, credit card companies were on the top of the wish list for South Koreans to work for. Some company gave as much as 40% of the yearly salary as bonus. Overall, the industry made a record profit in the first quarter last year.

Things were beginning to change dramatically by the turn of last year. Kookmin Credit Card and KEB Card fell into the red. The situation was almost the same with most of the other credit card companies. They recorded millions of won in loss.

Experts diagnose the industry itself as the cause of the hardship faced by the industry. They argue that the companies failed to exercise due diligent in soliciting their customers, and neglected in monitoring the financial situations of them. Nevertheless, they also point to the government`s failure as another cause in leading the industry to soft landing.

▽ Boost for domestic consumption = In April of 1994, the government announced major deregulatory measures to boost the economy, and, thereby, help South Korean companies to move out of the doldrums. At that time, export was hitting the bottom. Therefore, the only way out was to stimulate the domestic consumption.

First, the government erased the cap on cash advance a person could make. By that time, a person was allowed only to withdraw only up to 700,000 won (or approximately $580) a month in cash advance. From that time, each credit card company could set different caps for different individuals depending on each person`s credit limit.

Right upon introduction of the policy, credit card companies increased the limit up to millions of won. For the next two years, a credit card holder got to withdraw an average of 2.3 million won (approximately $2,000). In the name of securing more tax revenue sources, the government began to give tax credit to the amount used by credit card. Moreover, a "receipt lottery system" was ushered in. Thus, a card company picked up a particular receipt number, and gave the holder some prize money.

Above all, many point to the aiding and abetting policy of the government as the cause of the industry`s downfall. Credit card companies` salespeople solicited customers on the street. Aware of the skyrocketing cash advance amounts, the Financial Supervisory Service tried to ban the practice. But the Regulatory Reform Committee objected the idea, citing various reasons including the damage to credit card companies, fairness between industries and loss of 100,000 jobs related to the practice.

▽ Dramatic regulatory measures = With more and more people filing bankruptcy or becoming insolvent due to the credit card debt, the government could no longer side with the credit card industry, and came up with diverse dramatic measures against the industry.

The Financial Supervisory Service directed the industry to stash away more money for reserve purposes, cut down on the cash advance limit by half by the year of 2004, and lower the fees on the advances.

A stock analyst opines, "At that time, the economy was slowing down, and the credit report system exposed all the information on the debtor to banks. All of sudden, the government came up with harsh measures. That was the problem."

One illuminating example was found in the mandatory increase in reserve. Mirae Asset`s analyst Han Chung-tae criticized, "Last year alone, credit card companies had to raise the reserve amount three times." Kookmin, for example, had 428.2 billion won for reserve purposes. Last year, however, it held 1.54 trillion won in reserve. For the same time period, it asset rose by 33%.

Dramatic cut in cash advance limit led to other side effects. In response to the policy, credit card companies offered long-term installment plans to their customers with 0% APR.

Furthermore, the government loosened the requirements for filing bankruptcy and insolvency. In the process, individuals became more lax in terms of responsibility. One industry expert complains, "More and more individuals think they don`t have to pay back their credit card debts. Of course, the industry itself should reform itself. A reform is also needed on the part of the customers."

With the deficit snowballing day after day, the government came up with yet another measures yesterday, allowing, for example, the industry to raise the APR on the cash advance. But most experts and South Koreans accuse the government and the industry of dumping the costs of their failure on the innocent customers.

Na-Yeon Lee larosa@donga.com