FINANCE

No bubble yet

Sriwipa Siripunyawit

Growth in the use of credit cards has been phenomenal in recent years.

THAILAND'S consumer credit market in the past few years has been experiencing rapid growth due to several favourable elements. Credit providers, both banks and non-bank players, are confident that the trend will continue though policymakers have recently expressed worries over the potential for a credit bubble.

Growth in both secured and unsecured credit has been driven by consumer confidence due to the improving pace of the economic recovery, pent-up demand and heavy promotions by credit providers. Consumers are being wooed by card issuers and personal loan providers, the latter often in alliances with appliance sellers and hypermarkets. Low interest rates have also spurred demand for home mortgages and auto hire-purchase financing.

However, historically low interest rates are not seen as a significant factor influencing the use of personal loans and credit card finance since most customers in these segments tend to be interest rate insensitive.

According to David Hendrix, an executive vice-president of Kasikornbank, demand for unsecured personal loans, credit cards and personal overdrafts can be linked to the growth in home ownership by the middle class and greater confidence in economic growth.

Government policies such as the 30-baht health-care scheme, farm debt relief and the village fund programme are not seen as significant contributors to consumer loan growth since most lenders have focused on middle-income earners in urban areas.

"However, the brisk risk in auto and pickup truck sales may be due in part to those policies," said Mr Hendrix.

One trend that has been pronounced in the past three years is the issuing of credit cards by non-bank finance companies. According to the Bank of Thailand, at the end of 2003, the total amount of credit cards in use was 6.7 million, with 4.2 million issued by banks and 2.5 million by non-banks. The central bank said 2.37 million credit cards were held by cardholders with a monthly income under 15,000 baht. And while the central bank has moved to raise minimum income levels for card applicants, issuers are confident that they can continue to find more customers. "Since the middle class continues to grow and consumer confidence remains high, the demand for consumer credit will continue to grow in double digits, albeit not at the same torrid pace as the last four years," said Mr Hendrix.

Rapid growth has prompted concern among policymarkers about the potential for a credit bubble, when consumers overspend and take on unsustainably higher levels of debt than they can afford. Particularly, given the prospect of a rise in interest rates in the near future, authorities are worried about the impact on household finances and consumers' purchasing power.

However, higher interest rates are seen as more likely to affect mortgage and auto loan demand, which are more rate-sensitive than unsecured consumer loans.

According to a central bank report, household debt currently stands at around 70% of gross domestic product, compared with 50% in Australia and more than 100% in Korea. Of the total, 44% of Thai household debt represents home mortgages, with the remainder other consumer debt.

In 2002 the Bank of Thailand took the precautionary step of issuing regulations requiring a minimum monthly income of 15,000 baht for credit card applicants. As household debt rose, the central bank moved in March this year to tighten its rules. It now bans all card issuers from offering gifts as marketing enticements for new applicants.

For bank-issued cards, besides having a minimum monthly income of 15,000 baht, cardholders must now place deposits as guarantees against their credit lines, or show a suitable level of income over the past six months to ensure regular repayment. Non-bank issuers, such as GE Capital, Aeon Thana Sinsap and Cetelem, must also adhere to the 15,000-baht income minimum or ensure that clients have a stable cashflow history.

The central bank has also increased minimum monthly payments from 5% to 10% of the outstanding balance and banned the use of credit cards for those with payment defaults for more than three consecutive months.

Concerns about household debt levels and the upward trend in delinquencies have also caused lenders to be more selective in granting unsecured credit of all types. According to Mr Hendrix, it is believed that individuals with monthly incomes of between 5,000 and 30,000 baht have high levels of unsecured personal debt and that loan growth rates for this segment cannot be sustained. "Some lenders are increasing interest rates and adding collection staff to cope with higher default rates," he added.

However, the prospect appears remote of a credit crisis along the lines that South Korea is experiencing. One reason is that Thailand now has two functioning credit bureaus, which will soon be merged into one, to which lenders contribute data shared by all. Korea lacked such an institution and lenders were unable to verify the debt burdens of loan applicants.

Second, most major lenders in Thailand make extensive use of credit and behaviour scores that rely heavily on the credit history of borrowers, debt capabilities and employment. Third, most card issuers in Thailand monitor and limit cash advances but allow revolving credit. In Korea revolving credit was unavailable so cardholders tended to use cash advances to make payments among multiple credit card companies, said Mr Hendrix.

Nampung Wongsmith, chief executive officer at Central Credit Information Services, a credit bureau, acknowledges concern about the ongoing increase in household debt. However, she said the authorities have been coping well through tightened policies and systems.

Besides, both credit bureaus have also implemented systems to guard against risk.

They are now working to set up an "alarm system" that would alert member lenders about borrowers who are approaching default and credit risk.

As well, a credit scoring system will be in place soon to rate consumers based on credit spending behaviour.

In this respect, the authorities should also encourage the continued development of a strong credit bureau environment and use analytical tools for risk-based pricing so that all segments of the consumer market have access to the right levels of credit at the right risk-adjusted price. Such risk-adjusted lending models will help protect consumers as well as the financial system from too much of the wrong kind of debt.