• Wednesday, May 22, 2019

Credit card relaxation may be the next debt problem for China

Discussion in 'World Affairs' started by Hamartia Antidote, May 10, 2016.

  1. Hamartia Antidote

    Hamartia Antidote ELITE MEMBER

    Nov 17, 2013
    +25 / 11,741 / -4
    United States
    United States

    Central bank plans will allow credit card issuers to operate more like Western counterparts, but could fuel personal debt problems.

    The People’s Bank of China (PBOC), central bank to the world’s most populous country, is going to relax its restrictions on mainland banks’ credit card business. So, it is time to worry about a spike in personal debt from overspending.

    More education should be done to prevent that from happening.

    The PBOC has said that from the January 1, 2017, mainland banks will be given more freedom to conduct their credit card business.

    The daily cash withdrawal limits from the credit card lending will be increased to 10,000 yuan (HK$11,994 ) from the current cap of 2,000 yuan. Also, mainland banks will be allowed to set their own periods of how much they will charge if clients fail to repay their bills on time.

    The move has pros and cons.

    On one hand, it will allow mainland banks to run more like the western peers because they will be allowed to decide how much interest they charge clients if they fail to repay their bills on time. It has not yet reached the freedom of Hong Kong or Western lenders who can freely set the cash withdrawal limit for clients.

    The negative impact from such a move, however, is that personal bad loans are set to rise.

    Any bankruptcy experts in Hong Kong will tell you how many poor youngsters became bankrupt at a young age because they could not repay their credit card bills and that could balloon.

    Credit card interest rates are at the top of all types of bank loans.

    While most bank give zero interest rate to depositers, they charge a three to six per cent interest rate for tax loans and about a 12 to 18 per cent for personal loans. But on credit card loans, the rate is about 32 to 36 per cent, depending on which banks issue the credit card.

    How much does it mean?

    Assume you borrowed HK$20,000 on your credit card in Hong Kong at an interest rate of about 36 per cent. And say the credit card holders only repay the minimum repayment about 1 per cent, or about HK$200 per month. It would take 26 years and three months for the borrowers to repay the loan of HK$20,000. The total payment would be about HK$70,000, more than three times that of the HK$20,000 initial credit card loan.

    This is assumed the credit card borrowers have no new loans. If they have any, then the total loans will be higher.

    At present, most Chinese loan problems are related to the corporate sector — state-owned enterprises borrowing too much for their expansion.

    On a personal level, since not all mainlanders have credit cards and even those who have are subject to the restrictions set by the PBOC.

    If the PBOC is now going to relax the credit card cash restrictions, will mainlanders understand this is not just a cash withdrawal but in reality it is a type of bank borrowing?

    Do they now how high the interest rate would be? Do they know they may need 20 years plus to repay spending on a credit card?

    More warning and education is needed before the PBOC changes its rules.

    Or otherwise, the victim may be an ignorant mainlander who do not really understanding credit card spending is just a type of high interest rate personal loan.