"The outlook revision reflects Fitch's general concerns over Taiwan's banking system brought about by the banks' aggressive growth in unsecured consumer loans and the subsequent deterioration in the quality of such loans as compounded by the authorities' inept handling of the unfolding debacle," says Jonathan Lee, senior director in Fitch's financial institutions group.
The annualised charge-off rates on credit card and cash-card loans soared to 14% and 17% respectively in January 2006 from a level of around 6% in recent years. The initial rise in the delinquency rates in the third quarter of 2005 was due mainly to the banks' overly aggressive approach in growing these high-risk portfolios and inadequacies in their credit scoring models. But in Fitch's view, a subsequent worsening of credit quality has been triggered by the government's misguided response to the consumer debt fiasco.
Since December 2005 the government has responded to popular pressure to assist heavily indebted borrowers and penalise lenders. Measures proposed but not yet implemented include caps on interest rates at well below-market levels and a new bankruptcy law focusing mainly on individuals. Measures already implemented include pressure on banks to restructure the loans of heavily indebted borrowers at low interest rates.
The media in Taiwan has also stirred up the popular pressure by running educational stories for heavily-geared customers about how to deal with (or avoid) collection agencies, as well as how to negotiate with banks and use laws for self-protection. Legislators have claimed that some of the credit-card issuers were trying to set traps and make huge profits on unsuspecting customers.
The negative publicity spurred a sense amongst the debtor public that they were not alone and that the longer they waited the better the repayment conditions might get. The upshot: since its establishment last November up intil February, the restructuring conciliation board had received a mere 11,000 debt-restructuring applications while more than 400,000 customers have defaulted on their loans for more than three months.
Fitch notes that the deterioration in the quality of Taiwan's consumer loans which began in mid-2005, was sharper and more sudden than expected, given the lenders' access to Taiwan's comprehensive consumer credit bureau. It highlights how overly-aggressive credit extension, market competition and inappropriate regulatory intervention can increase instability in banking systemse even with reasonably good risk management infrastructures.
"It is difficult to quantify the repercussions caused by the moral hazard problem. Fitch is concerned that, if not curbed, it may spread beyond card lending to contaminate the quality of other forms of consumer lending. Provided it does not spread to other areas, especially mortgage lending, the agency believes the extent of the ongoing credit card and cash-card debacles is manageable by the system as a whole," says Lee.
Fitch has conducted stress tests to analyse the effect on capital for all banks issuing credit cards and cash cards as well as the system as a whole. Fitch found that in a severe loss scenario (20% and 30% loss assumptions for credit-card receivables and cash-card loans respectively) the system would suffer a 100 basis point decline in its aggregate Tier 1 ratio to a still adequate 8.4%. However, the effects are unevenly distributed across banks with the more heavily exposed banks suffering the most.
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