Credit Card Companies, Cautious About Business Expansion Despite 'Leverage Easing' in Second Half of the Year (Comprehensive)

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

Photo by Yonhap News

[Asia Economy Reporter Ki Ha-young] Despite the long-awaited relaxation of leverage limits, credit card companies are showing caution 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 (COVID-19) and that there may be a crisis in asset quality, such as a sharp rise in delinquency rates starting in the second half of the year.

According to financial authorities and the card industry on the 1st, the supervisory regulations for specialized credit finance companies will be amended to relax the leverage limit for card companies from 6 times to 8 times between August and September. The amendment will take effect from October. This is a follow-up measure to the 'Financial Regulatory Flexibility Plan in Response to COVID-19' announced by the Financial Services Commission and the Financial Supervisory Service in April.

The leverage ratio refers to the ratio of total assets to equity capital. Under the current Specialized Credit Finance Business Act, card companies are subject to a leverage ratio regulation that prohibits total assets, including card loans and cash service supply amounts, from exceeding six times their equity capital. 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.

However, even if the leverage regulation is relaxed, 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 quality.

According to the Korea Federation of Credit Card Associations, 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. The industry views this as a 'temporary effect' due to the government's emergency disaster relief funds. Since consumption showed negative growth of -4.3% and -5.6% in March and April respectively due to COVID-19, it is difficult to say that consumption has recovered to pre-COVID-19 levels.

An industry official said, "Although the expansion of the leverage limit provides room to pursue new businesses, the situation is difficult due to the impact of COVID-19." Another industry official lamented, "The household loan risk weight is high at 115%, making loan expansion practically difficult. Also, 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." Korea Credit Rating also pointed out regarding card company soundness that "there is a possibility that defaults may suddenly surface when the debtor's principal repayment deferral policies end."

So far, the card industry has continuously requested the financial authorities to expand the leverage limit. The lower the leverage ratio limit, the narrower the scope of business operations. Most financial companies, including capital companies subject to the same Specialized Credit Finance Business Act, have a leverage ratio limit of 10 times. In fact, some card companies are close to 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, all 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.