Ministry of Justice to set interest ceiling on card debts

This article was published by the Taiwan Headlines on March 10, 2006. It reports that the Ministry of Justice in Taiwan recently drafted a new "credit card chapter" for the civil legal code, which will place a ceiling on the debt permitted by credit card and cash cards. The ceiling will be based on the interest rate for policy loans, plus a fixed percentage point, and it will be timed by a fixed figure. Banks that charge interest rates for card debts over the new ceiling will be held liable.

The Ministry of Justice will discuss the draft with the Financial Supervisory Commission in order to finalize the fixed figures for the ceiling. Then the draft will have to be approved by the Executive Yuan. Once approved, the new debt ceiling for credit card and cash card will supersede the existing 20 percent interest ceiling currently allowed by Taiwan's civil code.

While the ceiling is designed to prevent the insolvency of new cardholders, existing insolvent debtors still have to settle their debts according to the regulations of Taiwan's debt clearance law and bankruptcy law.

Officials from the Ministry of Justice said that the draft legislation's ceiling on card-debt interest follows the example of the interest ceiling for consumer loans in Germany. The portion of the card-debt interest exceeding the new ceiling will be regarded as "invalid", and those banks that exceed the ceiling will be held liable for improper profit making.

The Financial Supervisory Commission opposed the draft. Representatives of the organization argued that the new ceiling will lead to the emergence of a new batch of insolvent card debtors and will not solve the existing card debt problem. Because banks are likely to tighten credit and withdraw loans for cardholders that have a risk factor exceeding the ceiling, casing them to instantly become insolvent debtors, the number of insolvent card debtors in Taiwan will increase considerably. Moreover, because banks will become very cautious in extending loans, high-risk clients will likely be forced to go to private moneylenders.

The number of insolvent card debtors in Taiwan is now estimated at 500,000.