Card-debt turmoil may extend to auto and housing loan markets

This article was published by the Taiwan Headlines on April 3, 2006. It reports that Taiwan's recent card-debt problem, with a scale of hundreds of billions of New Taiwan dollars, may extend to the auto- and housing-loan markets and involve trillions of dollars of debt. This may in turn lead to the eruption of a financial storm in Taiwan.

The government's Financial Supervisory Commission recently confirmed that some banks have expressed concern over the possible wait-and-see attitude among bank debtors due to the drafting of the bankruptcy law. However, the commission disagreed that there might be a financial storm. According to the commission, the government will be very careful in drafting the bankruptcy law, and will endeavor to achieve a balance between the interests of debtors and creditors. Meanwhile, banks should strive to intensify their risk management.

Indeed, many credit- and cash-card debtors have adopted a wait-and-see attitude toward debt payment, including those for auto and housing loans. This article cites the Chinatrust Commercial Bank as an example. So far in 2006, among those with over 30 days of debts, the rate of those who have gone into hiding has jumped to 15 percent, about 5 percent over the past level. This means that for every 100 persons who have borrowed money from the bank for just 30 days, 15 have disappeared.

Statistics provided by the Financial Supervisory Commission show that currently outstanding amount of hosing loans extended by all banks has hit NT$4 trillion, while that of auto loans has amounted to NT$140 billion.

According to industry analysts, despite the fact that housing and auto loans are protected by collaterals, if loaners embrace a wait-and-see attitude in their debt repayment, then banks may be forced to appropriate huge bad-debt reserves. This will affect the finance of these banks and possibly lead to the eruption of a financial storm. For instance, several years ago, due to the busting of housing-price bubbles, there appeared a huge amount of non-performing housing loans, which forced the banks to dispose of their collaterals via public auction.

According to industry analysts, when a bank discovers abnormal situation in the repayment of auto or housing loans, it will inform debtors of its intention to dispose of the collaterals. So far, repayment of the two loans at Taiwan's banks has been generally normal. However, the recent mechanism set up by the Financial Supervisory Commission for the negotiation of card debts and the drafting of the bankruptcy law have indeed provided certain encouragement to some consumer-loaners. These loaners have chosen to adopt a wait-and-see attitude in hope of securing an agreement from their banks to cut their interest rates.

According to industry analysts, the cash and credit card turmoil is confronting three major risks - credit risk, moral hazard, and legislation risk. The uncertainty demonstrated in the government's policies has prompted some card debtors to adopt a wait-and-see attitude. It is even encouraging more people to default on their card debts, which leads to continuous rise in bad debts at banks.

At present, about NT$156 billion, or 20 percent, of the outstanding cash and credit card loans of NT$780 billion have become bad debts. This amounts to about NT$3 billion for each of the 50-odd card-issuing institutions in Taiwan, which is still within the manageable scope. However, industry analysts warn that the real risk is in the policy uncertainty, which has encouraged card debtors to adopt a wait-and-see attitude. The policy uncertainly has even affected normal loan extension in the markets of unsecured loans (with outstanding amount of NT$1.2 trillion), housing loans, and auto loans. Indeed, some banks have suspended the provision of 100 percent housing loans from the second half of 2005. Other banks have also cut the percentage of housing loans and required the provision of guarantors for those housing loans that amount to over 80 percent of housing prices, in order to prevent card debtors with no repayment ability from borrowing housing loans.