Down and Out In East Asia

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Down and Out In East Asia

The explosion of consumer credit in Asia has led to a surge in personal consumption. But it's also bankrupting record numbers of people

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By Suh-kyung Yoon/HONG KONG

Issue cover-dated August 30, 2001

EDMUND HO was a typical Hong Kong yuppie--a 9-to-9 job in Central, a tidy salary, stock options, nine credit cards and HK$427,542 ($54,800) in debt. Counting on a pay-off from selling his stocks, Ho had charged vacations to Europe, Armani suits, Peninsula Hotel meals and everything else on his credit cards for the past year. Instead of shooting through the roof, his stocks took a nosedive. After four months of watching his debt grow nearly 25% every month, he decided to declare personal bankruptcy.

Ho is not alone. What was once a problem for Asia Inc. has now hit the streets--throughout the region, more and more individuals are filing for bankruptcy. In Hong Kong, their numbers have increased eight-fold since 1996; 32% in the past year alone. Not one case of personal bankruptcy was registered in Korea until 1996. But since then, 1,000 have been. Not surprisingly, after a decade of economic stagnation, Japan has also seen bankruptcy cases hit historic highs. But the increase has been especially dramatic in the past few years: 140,000 people sought court protection from creditors in 2000, almost double the number in 1997.

"Consumer-debt problems, including personal bankruptcy, are the most serious issues banks and governments throughout the region will have to face in the coming years," says Stephen Briscoe, an accountant at BDO McCabe Lo & Co. in Hong Kong, who helped draft a Consumer Debt Report for the International Federation of Insolvency Professionals.

Contrary to common belief, the vast majority of bankrupts are not businessmen whose small to mid-sized companies have gone belly up. "We've seen the number of company insolvencies slow down significantly in the last few years," says Eammon O'Connell, Hong Kong's Official Receiver. "Over 90% of our caseload is now individuals and the problem in 65% of these cases is simply overspending on credit cards."

Asians have gone on a debt binge in the last four years, borrowing more than they have ever before. According to financial consultancy Lafferty Group, consumers in Australia, Hong Kong, India, Japan, Korea, Singapore and Taiwan have racked up $802.3 billion in debt, and that's not including mortgages. In Japan alone, up to 12 million people--or roughly one in eight adults--find themselves saddled with high-interest consumer loans totaling more than $200 billion.

"Consumers in Asia today are not wallflowers waiting to be persuaded to use credit," says Andrew Liew, head of ABN Amro's retail bank in Singapore. "The young especially do not hesitate to get what they want with the aid of banking products. They are certainly no strangers to credit." That's true even in China, which has one of the least-developed credit cultures in Asia. A survey by the China Economic Monitoring and Analysis Centre earlier this year found that over 52% of respondents had borrowed from the bank while 19% had used credit cards before. In the region, there are 196 million credit cards in use.

Long gone are the days when borrowing money in the region meant huddling in dimly-lit street corners and fending off yakuza, or criminal gang, loan sharks. Today, credit is easier to get in Asia than ever before. In fact it's almost hard to avoid. Banks are inundating consumers with all sorts of promotions--in Hong Kong, HSBC is offering Palm Pilots and Standard Chartered DVD players if you sign up for a credit card. You can also get up to HK$15,000 in just 30 minutes through the "Cash in a Flash" service provided by Aeon Credit. In Japan, its even more convenient--just visit one of 1,500 ATMs run by consumer-finance companies like Takefuji. Stand in front of the camera, plug in your details and your loan will pop out in less than 10 minutes--a debt-vending machine.

All this is a departure for Asian banks to which retail banking had simply meant taking in deposits for much of their history. Banks across the region had acted as a one-way conduit, funnelling money from consumers' pockets to the treasuries of companies. When these corporate borrowers went belly up during the 1997 financial crisis, their commercial businesses dried up. Mortgages, another area many had focused on, quickly became saturated with competition. There was nowhere else to turn but to consumers.

"Once, banks in Asia used to think that the consumer business was a difficult one with great risks," says John Caparusso, head of banking research at Salomon Smith Barney. "In fact, credit cards and clean personal loans are a fantastic business with very high margins. There's a growing awareness that they can be extravagantly profitable." Return on equity in the credit-card industry averages 30% while personal loans are also extremely profitable when companies can borrow at 2% and lend out at 25%, as they do in Japan.

That's particularly true in Asia at present. "Over the long haul, Asia has simply gotten richer, younger and more educated," Caparusso says. "All these factors very much favour the growth of a consumer-oriented culture, which then fuels consumer-oriented businesses like financial services." The Lafferty Group estimates that consumers in Australia, Hong Kong, India, Japan, Korea, Singapore and Taiwan now have disposable incomes totaling $4.46 trillion, not much less than Europe's $5.01 trillion, but largely untapped by credit products. Only 7.3% of that sum is spent through credit cards in Asia compared to 35% in the United States. Also, consumers in the region pay off their total balances at the end of the month, depriving card companies of interest earnings. In the U.S., over 90% of credit-card payments are made after they are first due.

Such juicy figures have also whetted appetites at global giants like Citibank, HSBC and ABN Amro, which saw the financial crisis as an opportunity to swoop in and expand their regional business. All are beating a path to becoming what the Lafferty Group has termed "godzillas"--banks with at least 100 million clients worldwide and that see Asia as a crucial area of growth. Citibank has already passed that mark, partly by doubling its credit cards in Asia since 1995. Ed Eger, head of Citibank's regional card operations adds, "I'm confident that we can double our numbers again by 2005."

So both godzillas and minnows like Hong Kong's Dah Sing and Taiwan's ChinaTrust have jumped into the credit-card and personal-loans business in the last four years. To do so, many have hired away top talent from Citibank, considered the best in the business. Standard Chartered's chief executive, Rana Talwar, and Masamoto Yashiro of Shinsei Bank (once the bankrupt Long-Term Credit Bank) are just two former Citibankers now heading up retail-focused institutions in the region. "We've trained the competition," boasts Citibank's Eger. Though he's never put in time at Citibank, Wilfred Horie, hired to turn around troubled Korea First Bank, earned his reputation building up Associates First Capital, one of the most successful foreign consumer-finance ventures in Japan.

This sudden rush into retailing has resulted in creating the "fastest-growing credit-card market in the world today," according to Lafferty. Korea alone saw a 110% jump in the number of cards in 2000 while even a market like Hong Kong, where there are already 2.5 cards per person, grew 25% since May last year. Household lending by Korean banks almost doubled from 1999 through the middle of 2000 to 80 trillion won ($62.5 billion), according to the Bank of Korea.

But as credit has flooded the market, delinquency levels have started to creep up. In Hong Kong, nonpayment of credit-card totals for more than 60 days are up to 1%; they were less than 0.5% just last year. In Korea, more than 2.7 million individuals have become delinquent on their loans, and in Japan many consumer-finance companies have seen their write-off ratios increase steadily. Aiful, for one, had nonperforming loans totalling 4.12% of their assets in 2000, whereas NPLs stood at just 2.2% in 1996.

In Japan, where credit cards have never taken off (most plastic there comprises debit cards, on which the full balance must be paid at the end of the month), consumer-finance companies, or shinpans, have filled the credit vacuum, handing out quick and easy personal loans. These companies have grown dramatically in the 1990s as the rest of the economy suffered. The largest--Takefuji--increased its profits by 13% on average each year since 1995, making its founder, Takei Yasuo, the richest man in Japan.

DEBT TRAP But as companies like Takefuji have grown their businesses by lending more, some of their customers have fallen into a debt trap. H.K, a 40-something nurse living in northern Japan, for one, had accumulated almost ¥8 million ($65,350) in loans during the course of two divorces and gambling and alcohol addictions. Though she had already accumulated much of her debts from banks and credit cards, she was able to borrow more from Promise, a consumer-finance company. "A Promise lady said existing debts I had were no problem," she says, adding that the company even encouraged her to take more than she had asked for. The Promise staffer "forced me to take all the ¥400,000 he prepared, which was more than I needed . . . I spent all the money I got."

Japan's National Consumer Affairs Centre says 86.9% of debtors are burdened with shinpan loans. "The use of consumer credit has been expanding," says Takuya Kimura, a lawyer who specializes in consumer-credit issues. "Now it accounts for 22%-23% of total consumption in Japan. It's natural that the number of debt sufferers has increased."

Some blame banks for indiscriminately handing out cards to everyone who applies. "Its too easy to get credit cards in Hong Kong," says Pamela Chan, chief executive of the Consumer Council. "It takes two to tango. The banks say they are concerned about defaults. Well, then they should be more careful when they issue cards." She adds that banks have confused consumers by printing monthly interest rates in big bold letters and astronomical annualized numbers in tiny type.

That's just shrewd advertising, counter the banks. They also point to the lack of formal credit bureaus in the region as one reason why they cannot carry out more detailed credit checks. In Hong Kong it is illegal to gather "positive" credit information about any individual; only "negative" information (delinquencies, bankruptcies) can be compiled. "People may criticize banks for giving credit cards to everyone," says Alex Yuen, managing director of Credit Information Services, a database of "negative" credit histories. "But to be fair, the banks don't have any solid reason to turn them down."

As for the increase in personal bankruptcies in Hong Kong, Yuen claims that it has more to do with a change in attitude than anything else. Hong Kong's bankruptcy law was changed in 1998, allowing for an automatic discharge after just four years. More than 35% of those filing for bankruptcy never go through a period of delinquency before heading to the courts. "The attitude has changed--definitely," says Peter Wong, chief executive of Standard Chartered in Hong Kong. "In the past, people would not bankrupt themselves even in the worst circumstances because it was a loss of face. That's not true anymore."

http://www.feer.com/2001/0108_30/p044money.html

-- Martin Thompson (mthom1927@aol.com), August 29, 2001

Answers

The figure that jumped out at me was that over 90% of the credit card users in the U.S. pay up after they are due, which means they are paying these insane 16% to 19% interest charges.

Have Americans gone stark, raving nuts? Whatever happened to personal financial responsibility?

-- Uncle Fred (dogboy45@bigfoot.com), August 29, 2001.


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