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[ThatHawaiiGuy]

Asia's Hello Kitty consumers lap up credit
By John Mulcahy

In 1998 South Koreans lined up to donate their gold jewelry in a profound display of voluntary economic sacrifice. Sacrifice seems no longer the order of the day. The country is suddenly reeling from a consumer credit binge, and nor is it alone. South Korea is the champion of credit-card growth, but double-digit annual growth in credit-card receivables has been recorded in Thailand, Taiwan, India, Singapore, Hong Kong and Malaysia over the past five years.

For generations, Asians have been the world's most thrifty savers, with an average savings rate across Asia outside Japan of 31.6 percent of gross domestic product (GDP) in 2002, according to the Asian Development Bank (ADB). As late as 1997, the Chinese were saving an astonishing 75 percent of their total income. The only countries in Asia with savings rates below 20 percent are Pakistan, at 12.7 percent of GDP, and the Philippines, at 16.8 percent.

The implications of the current rampant consumerism are unknown, but they could be cause for serious concern. Growth in credit-card usage everywhere in Asia has been consistently outstripping GDP growth and, according to consultants McKinsey, the growth in credit cards has been accompanied by rapid growth in defaults. In Hong Kong, personal bankruptcy has become a recognizable household finance strategy, with personal bankruptcies in 2002 more than 28 times the number in 1998. Japanese-owned AEON famously used the Hello Kitty brand to expand its market penetration. These cards, issued almost instantaneously, allowed AEON to leapfrog many of its competitors' market share. In Thailand, GE Capital used a different ploy, offering private-label credit cards, giving it access-by-proxy to a huge customer base.

It appeared from these successes that credit cards were an easy way to make money. Younger consumers, unconstrained by their parents' traditional aversion to risk and credit, and driven by peer pressure to accelerate consumption, have changed the landscape for credit-card issuers. But the headaches from the binge are painful, and there is no quick fix. Legal systems are not equipped to deal with the phenomenon of consumer-credit delinquency, and there is a limited culture of personal bankruptcy.

A McKinsey report advocates the establishment of regional credit bureaus, which are currently used in Asia only to share negative information, such as late bill payments and loan defaults. "But for bureaus to make a true assessment of a borrower's risk, they must also have access to positive information, including current outstanding loans, available credit limits and payment histories," McKinsey says.

The firm makes the point that banks can limit the total debt of individuals to a reasonable multiple of their incomes by sharing information about existing loans through a bureau. But "if some institutions fail to work with it, individuals can always exceed that limit by borrowing from those that don't participate".

In a way, Asia's wayward private borrowers can be understood, if not forgiven. As the dust settles on the Asian financial crisis and attention is turned to the next growth phase, the stock of non-performing loans is in excess of US$2 trillion. This burden on the region's banks remains a ticking time bomb, as in many cases the banks have resumed lending without adequately dealing with the gaps on their balance sheets.

Perhaps the only good news on the consumer-credit front is the fact that China has not yet embraced this form of lending. China is still struggling to cope with its huge corporate-debt problem, and compounding this with a consumer-credit crisis would pose serious questions about China's capacity to deal with its overall credit problems. Not that China's entrepreneurs are unaware of the opportunities in the credit-card market, of course. This year it was reported that a fake-credit-card ring had been cracked, as police seized more than 17,000 MasterCard and Visa credit cards. It is estimated that fewer than 5 percent of court judgments in China are enforced, and these are all corporate borrowers. There is no tradition, at least in the past 50 years, of banks using courts to enforced credit agreements.

Debtors throughout Asia have exploited weak legal systems. Thailand's antiquated system, requiring creditors to prove insolvency before enforcing arbitration, has seriously delayed debt consolidation and workouts.

The consumer-credit binge runs contrary to long-established conventional wisdom, which states that Asian individuals are risk-averse, and prefer cash to credit. They have learned very quickly, and official data seem to support the notion that Asian consumers are more wary of credit than their US counterparts. Up to 2001 there were no Asian countries with credit-card penetration rates approaching the 82 percent of the United States. By 2003, however, both South Korea and Hong Kong reported rates of credit-card use similar to the US, while credit-card usage has increased quickly throughout the region.

In South Korea, Standard Chartered's head of the consumer financing sector, in announcing the bank's intention to offer consumer banking services, said recently that the Korean market was "very attractive" because it represented 50 percent of Asia's consumer-loan growth. However, South Korea's consumer-debt defaults have been rising, due partly to the overall slowdown in the economy, but also to the tighter regulation, ending the practice of "card kiting", where holders of multiple credit cards use one card to repay outstanding debt on another.

South Korea's consumer boom, and indeed growth in consumption throughout Asia, has been seen as the solution to slower global growth. But aggressive marketing by banks and other financial institutions, desperate to replace corporate business lost to equity and other capital sources, has created the two-edged sword of consumer credit.

An ADB report notes that South Korea's "household debt surged to three-quarters of GDP as at end-2002, from less than half in 1999". Thailand's rapid expansion in private investment, according to the ADB (13.3 percent in 2002 from 4.7 percent the previous year), "appears to be related to housing construction rather than productive capacity".

It could be argued, of course, that after the investment binge of the 1990s, driven by easy capital and cheap credit, the last thing Thailand or its Asian neighbors need is more capacity. But the question is whether the excessive expansion of consumer credit will come back to haunt Asia, as its corporate-credit binge did five years ago.

The end of Asia's asset-price inflation boom in 1997 produced a commercial-credit crisis that shattered the region's reputation for savings-driven economic expansion. Non-performing loans as a proportion of GDP among Asian countries range from around 10 percent in the Philippines to well over 50 percent in China. In Thailand and Malaysia, bad debts represent more than 40 percent of GDP.

Traditionally, Asian banks accepted deposits from the region's thrifty individual depositors, lending the funds to corporate borrowers with little apparent regard for effective risk management. The collapse of corporate balance sheets across the region after the 1997-98 crisis persuaded the banks to shift their lending focus to consumers. Described more than a year ago as "the single most powerful theme in Asian financial services", consumer lending has been the flavor of the year in 2002 and 2003. But these institutions have been discovering that the high rewards of consumer lending (gross margins on credit-card lending are 5 percent-plus) are accompanied by extremely high risk.

Private-consumption spending is cited as a key driver of economic growth in Thailand, Indonesia, Malaysia and other Asian countries. Aggressive pump-priming through monetary-policy measures (interest-rate reductions) and in some cases relaxation of consumer-credit controls have added an official imprimatur to the banks' inclination to explore retail markets as an alternative to the sluggish corporate credit environment.

The ADB notes that the strong growth in Indonesia's bank credit since 2002 has been due almost entirely to the consumer sector. The banks' loan-deposit ratio has risen sharply over that time, although it is still comparatively low at 45 percent. This high level of liquidity in the banking system reflected in the low loan-deposit ratio is reflected in high capital adequacy ratios (more than 20 percent), but the growth in consumer credit in Indonesia suggests the risks that have manifested themselves in South Korea and Hong Kong may in due course be repeated elsewhere in the region.

The pace of growth in household lending suggests it is likely there will be such negative consequences in due course. Up to the end of the 1990s, household credit represented 25-30 percent of bank lending. It is now estimated that this ratio has risen to 40 percent, and there is every sign it will continue to expand.

The consequences of this policy shift, without adequate credit controls, are already evident. In a single year - 2001-02 - default rates reported by South Korean banks on bank-issued credit cards rose to 12.2 percent from 7.3 percent. To put that into perspective, the increase in the default rate (4.9 percentage points) will have wiped out the profits on the credit-card business for these banks. In Hong Kong, where consumers have battled against collapsing asset prices and deflation for the past five years, the charge-off ratio for credit cards is about 12 percent. By comparison, the charge-off rate in the United States is about 7.5 percent.

It has long been accepted that there is a direct correlation between the delinquency rate of credit-card debt and the growth in volume. In other words, the sine qua non is that the more people who are issued credit cards, the greater the default ratio. It is inconceivable that the banks so aggressively issuing credit cards - in several markets credit cards are sent unsolicited to prospective holders - are unaware of this obvious link. It is simply a restatement of the Law of Diminishing Returns. And yet in Hong Kong, one of the more sophisticated banking markets in Asia, consumer bankrupts typically owe 42 times their monthly income in unsecured debt, according to McKinsey, double the debt of the average consumer bankrupt in the United States.

As Asia finally starts its recovery from the deep and prolonged crisis of the late 1990s, the South Korean example shows that there may be another credit crunch around the corner - and this time it may be even more difficult to extract payment from the defaulters.

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