With Leverage Limit Expansion... Card Companies Say "Breath of Relief"

Financial Authorities Expand Leverage Ratio from 6x to 8x
Some Card Companies Approaching 6x Leverage Ratio

[Asia Economy Reporter Ki Ha-young] As financial authorities decide to expand the leverage limit for card companies from the existing 6 times to 8 times, it is expected to ease the expansion of new businesses for card companies pursuing business diversification.

According to the card industry on the 20th, the industry welcomes the financial authorities' decision to expand the leverage limit. A representative from Card Company A said, "In the short term, the financial pressure caused by the extension of loan maturities for companies affected by COVID-19 will also be somewhat alleviated," adding, "It has somewhat eased the way for entering new businesses." A representative from Card Company B also said, "With this leverage limit expansion, the basic conditions for entering new businesses that require a lot of capital have been established," but added, "However, since the household loan risk weight is high at 115%, expanding loans may not be realistically easy."

On the previous day, the Financial Services Commission and the Financial Supervisory Service announced the 'Financial Regulation Flexibility Measures in Response to the Novel Coronavirus Infection (COVID-19),' deciding to expand the leverage limit from 6 times to 8 times.

Until now, the card industry has continuously requested the financial authorities to expand the leverage limit. Under the current Specialized Credit Finance Business Act, card companies are subject to leverage ratio regulations that prohibit total assets, including card loans and cash service supply amounts, from exceeding six times their capital. The leverage ratio refers to the ratio of total assets to equity capital, and the leverage ratio regulation is a financial regulation that limits asset expansion using debt. In other words, it restricts card companies from increasing loans or installment sales excessively relative to their equity capital through intense competition.

On the other hand, most financial companies, including capital companies subject to the same Specialized Credit Finance Business Act, have a leverage ratio limit of 10 times. Since a higher leverage ratio narrows the scope of business operations, most card companies have voiced that regulatory relaxation is urgent. In fact, some card companies are approaching the leverage limit. As of the end of last year, KB Kookmin Card and Woori Card were at 5.7 times, and Lotte Card at 5.6 times, nearing the leverage ratio limit. Shinhan Card was at 5.4 times, Hyundai Card at 5.2 times, and Hana Card at 5 times, all exceeding 5 times.

Meanwhile, the Financial Services Commission plans to strengthen liquidity risk management and supervision that restricts equity capital reduction activities such as dividend payments when the leverage limit reaches 7 times or more to induce preemptive leverage management.

This content was produced with the assistance of AI translation services.