Credit Card Woes?

Beginning next year, those earning less than RM3000 a month will have their access to easy credit card debt cut (excerpt):

Bank Negara to enforce limit on credit cards starting Jan 1

KUALA LUMPUR: Bank Negara has issued a new ruling to control and manage the debt of credit cardholders earning RM36,000 and below per annum.

The maximum credit limit extended to a principal cardholder in that category cannot exceed twice the holder's monthly income (RM3,000 x 2) per credit card issuer.

To further restrict their spending, they will only be allowed to be a principal cardholder from a maximum of two credit card issuers.

This means that the cardholder's combined credit limit will be capped at RM12,000.

The changes will be enforced from Jan 1 and banks have sent out notices to cardholders to conform to the new rules.

Those holding credit cards from more than two banks have been told to select their preferred two issuers and cancel the others.

They have 24 months to repay the outstanding balances on their cancelled credit cards…

…According to statistics compiled by Fomca, there are 1.92 million credit cardholders in the country who earn an annual income of less than RM36,000.

Overall, cardholders owe a staggering RM24bil to issuers…

Is there a credit card debt problem in this country? I’ve no doubt increasing numbers of young people are getting into debt too fast and too deep, but from a systemic view credit card debt is hardly a societal problem.

It makes nice press though.

Take that last line I quoted above – RM24 billion (actually the correct figure is RM31 billion) sounds like a lot, but it represents something like 3% of total loans, and about 5% of household debt. If you include non-bank household borrowings, that last ratio drops to around just 4.6%.

Credit card debt growth for the last couple of years has been in line with overall loan growth – in fact has underperformed for most of this year (log annual changes; seasonally adjusted):

If there was a problem, it was in the first part of the past decade. But as it is now, credit card debt is no bigger a problem than overall household debt. The only big difference here is that credit cards are unsecured and typically the first obligation households will default on.

Having said that, the ratio of unpaid balances has been falling for the last five years (ratio to total credit card balances):

And if you look at bad debt (balances unpaid for more than 6 months), it looks even better:

Since 2007, credit card debt overdue more than six months represents between 0.3% to 0.1% of credit card balances.

Card growth has crashed since BNM implemented the RM50 levy in 2009 (log annual and monthly changes):

There’s also the likelihood that the credit card market in Malaysia is already fairly saturated. There’s about 8 million cards currently in circulation, down from a peak of 11.2 million in 2009, and I think just about anybody who qualifies for a credit card has got one or two.

Malaysians are also being sensible about carrying credit card debt:

On average, just 24% of credit card balances are being carried forward. Compare that to an average above 40% in most advanced economies.

As for this new policy of limiting debt exposure for lower income households, I really don’t think it will have much of an impact beyond their own personal finances. Credit card debt simply isn’t a systemic risk, and for the most part Malaysian consumer usage has been reasonable and responsible.