Credit Card Companies Cautious About 'Leverage Relaxation'... "Loan Expansion Difficult Due to COVID-19 Impact"

Limit Increased from 6x to 8x
Loan Expansion Possible but
Concerns Over Delinquency Due to COVID-19 Impact

[Asia Economy Reporter Ki Ha-young] Despite the long-awaited relaxation of the leverage limit, credit card companies are showing cautiousness in pursuing new businesses and expanding loans. This is due to concerns that private consumption has not recovered from the impact of the novel coronavirus disease (COVID-19) and that there may be a crisis in asset soundness, such as a sharp rise in delinquency rates starting in the second half of the year.

According to financial authorities and the credit card industry on the 1st, the Credit Finance Business Supervision Regulations will be amended to relax the leverage limit of credit card companies from 6 times to 8 times in August or September. The amendment will take effect from October. This is a follow-up measure to the "Financial Regulation Flexibility Plan in Response to COVID-19" announced by the Financial Services Commission and the Financial Supervisory Service last April.

The leverage ratio refers to the ratio of total assets to equity capital. Under the current Specialized Credit Finance Business Act, credit 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 regulation is a financial regulation that limits asset expansion using debt. In other words, it restricts credit card companies from increasing loans or installment sales excessively relative to their equity capital through intense competition.

However, even if the leverage regulation is relaxed, credit card companies are not expected to immediately expand loans such as card loans and cash services or pursue new businesses. This is because private consumption has not recovered to previous levels due to the impact of COVID-19, and there are concerns about deterioration in asset soundness. An industry insider said, "Although the expansion of the leverage limit provides room to pursue new businesses, it is not an easy situation due to the impact of COVID-19."

Another industry insider said, "The household loan risk weight is high at 115%, making loan expansion practically difficult," and added, "From September, loan maturity extensions and interest payment deferrals implemented for small business owners affected by COVID-19 will expire, raising concerns about rising delinquency rates."

According to the Credit Finance Association, the total card (credit, check, and prepaid cards) approval amount in May was 78.1 trillion won, an increase of 6.8% compared to the previous year. This marked a turnaround to an increasing trend from -4.3% and -5.6% in March and April, respectively, due to the impact of COVID-19. However, the industry views this as a temporary effect caused by the government's emergency disaster relief funds.

Until now, the credit card industry has continuously requested the financial authorities to expand the leverage limit because a lower leverage ratio limit narrows the scope of business operations. Including capital companies subject to the same Specialized Credit Finance Business Act, most financial companies have a leverage ratio limit of 10 times. In fact, some credit card companies are approaching the leverage limit. As of the first quarter of this year, Woori Card was at 5.7 times, KB Kookmin Card at 5.5 times, and Lotte Card at 5.5 times, nearing the leverage ratio limit. Shinhan Card and Hyundai Card also exceeded 5 times, at 5.2 times and 5.3 times respectively.

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