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.

MBSB: Salary Deduction Is Low Risk

You’ve got to be kidding me:

MBSB adopts best industry practices: CEO

PETALING JAYA: Malaysia Building Society Bhd (MBSB) adopts the best industry practices when evaluating the creditworthy of a government servant and does not “simply disburse personal loans based solely on salary deductions,” according to chief executive officer Datuk Ahmad Zaini Othman…

…In a statement he said: “MBSB made an impact in the industry in mid-2009 when it re-entered the market and provided Personal Financing-i to government servants at the lowest rate of 4.90% per annum.

“This was markedly lower than most rates then which were above 7.50%. It was also significantly lower than another source of financing which is credit card at between 13.5% and 17.5% per annum or its cash advance withdrawals at the maximum of 18%.”

“MBSB believes that the rate offered is the true reflection of the level of risks undertaken by MBSB as repayment is collected via salary deduction.”

Sometimes Government Policy Does Work: Credit Card Edition

Back during the tabling of the 2010 budget, the Government proposed a RM50 levy on each principal credit card and RM25 on supplementary cards. I thought at the time and from the anecdotal evidence that the levy might have some effect on people “collecting” credit cards.

Boy, was I wrong (log annual and monthly changes):

The effect has instead been pretty dramatic – from an October 2009 peak of over 11.23 million cards (principal and supplementary), Malaysians have returned or cut up 1.15 million cards or just over 10% of the total. The sudden drop in card circulation has also skewed metrics based on card numbers – a definite structural break for those interested in statistically analysing the local credit card market. That’s probably cold comfort to the hoards of credit card sales agents across the country, but the impact must be pretty gratifying to policymakers at BNM and the Treasury.

On a side note, it also appears from the data that consumers are spending again:

The first chart above shows the percentage of current balances outstanding as a percentage of the credit line extended – card users are rolling over approximately 22% of their credit limits, which isn’t bad compared with many other countries, though it makes the whole business much less profitable for banks. The second chart shows that people are also swiping their cards more often, which bodes well for GDP growth in 1Q2010 – I think the economy will likely surprise quite a few people this year.

Technical Notes:

Data from Bank Negara Malaysia’s Feb 2010 Monthly Statistical Bulletin

Credit Cards: Much Ado About Nothing

Reading through the Sunday Star yesterday, I'm puzzled by the amount of vitriol attracted by the new credit card levy, with a RM50 tax on each principal card, and RM25 on each supplementary card.

The ostensible idea was to encourage "prudent spending", by effectively increasing the costs of access, which had dropped due to the proliferation of "free for life" cards. I'm not sure this is the right policy, or to be more precise, the most effective policy to implement based on the stated goal. On the other hand, a more effective policy might involve heavy handed intervention in the workings of the financial sector that would contravene the spirit of the past ten years of financial liberalization. It’s certainly generated a lot of angst among card-holders, but judging from the public response, the tax appears to be effective in achieving the government’s goal of reducing card “collections”.

But before going into a discussion of right or wrong, it's probably best to proceed from a basis of firm facts - what is the current situation in Malaysia now?

With the explosion of consumer banking that began after the 1997-98 crisis, credit cards and mortgages have been a key battleground for the banking industry. The number of cards have grown exponentially (in millions):




...as have outstanding balances:




This has been coupled with a fairly steady drop in bad debts, although you should note that the default rate is far from typical of other bank business lines (which average under 2%):



On the face of it, this look likes a fairly attractive market for the banks. From the consumer point of view, it doesn't look too bad either. On per card basis, it looks like consumers are acting relatively responsibly:






Balances per card are dropping, as are transactions. The percentage of balances not paid-off at the end of the reporting period is dropping as well even as credit limits are rising, indicating we're in no danger of turning into another Korea just yet.

What complicates matters is that number of cards ≠ number of cardholders. How would recasting the numbers on the basis of population look like? More specifically, based on labour force numbers, we see a very different picture - the ratio of the number of cards to the work force has risen from about 1 in 5 in 1998 to near parity in 2008:






Rollover balances have tripled in the last ten years, indicating card debt is increasing as a percentage of income, and transactions velocity has increased from about once a month to twice a month. The latter is not necessarily bad if balances were stable, but they are in fact increasing which is a little worrying.

So there’s a solid basis for the government’s concerns over easy access to high-cost personal credit. Is a flat tax the optimum effective solution to reduce card usage? Not hardly – ideally there would be some (fairly high) minimum threshold of income to qualify, and perhaps a graduated tax based on credit limits similar to the annual commitment fees banks charge businesses for revolving credit.

I’d also consider putting in a minimum interest rate floor, not just an interest rate ceiling as currently practiced. We are after all talking about unsecured revolving credit where even with bad debts at an historical low is seeing defaults average in the mid-teens (comparable to junk-bond default levels). Some banks are offering under 10% p.a. interest rate charges - I'm not sure if this is not mispricing the financial risk involved.

But such measures are a little harder to enforce on individuals – if income is the barometer, what about the self-employed or those who earn on a commission basis? If access to this segment is curtailed for what is arguably a legitimate portion of the working public, then hard rules based on income are inequitable – and we have enough inequity in this country already, thank you. It’s also more than possible to set limits on the number of cards any one person can have (through CCRIS), though this may involve some loss of privacy. On second thoughts, maybe not such a good idea.

On that basis, a flat tax is a second best solution that despite the fact that it is not yet in place, already appears to be working by all accounts - people are already talking about cutting up their excess, unused cards. I feel the tax measure was really put in place to replace the annual fees typically charged for credit cards, but too often waived by banks in the interests of gaining and retaining customers. Maybe if banks had committed to charging annual fees we might not be having this very public debate.

Technical Notes:
1. Credit card data from BNM's Monthly Statistical Bulletin.
2. Population data from DOS and EPU