Concerns Over Delinquency Rates and Fee Rate Recalculation... Card Industry "This Year Won't Be Easy Either" (Comprehensive)

Multiple Debtors Account for 63%
High Risk of Delinquency, Vulnerable Assets
Concerns Over Non-Performing Triggers After Repayment Deferral

Photo by Yonhap News

[Asia Economy Reporter Ki Ha-young] There are forecasts that the management environment surrounding the card industry will not be easy this year. This is due to concerns over deteriorating profitability ahead of the reassessment of merchant commission rates, as well as the possibility of loan defaults emerging due to the government's repayment deferral measures.

According to NICE Credit Rating on the 7th, as of the third quarter of last year, the proportion of multiple debtors holding three or more financial institution loans among the loan-type assets (card loans, cash services, loan-type revolving credit) of seven specialized card companies (Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, Hana) was 63.0%. This is an increase of 0.4 percentage points compared to the previous quarter (62.6%). The asset proportion of multiple debtors has been on the rise, recorded at 60.3% at the end of 2018 and 61.7% at the end of 2019.

Loan-type card assets of card companies mainly target small business owners with relatively low collateral capacity and debt repayment ability. In particular, loan-type assets related to multiple debtors are classified as vulnerable assets because they have a high proportion of low-income and low-credit borrowers and a high possibility of delinquency transition.

Despite the fact that small business owners' debt repayment ability has deteriorated due to the spread of the novel coronavirus infection (COVID-19), the combined delinquency rate (over 1 month) of the seven companies as of the third quarter of last year was 1.4%, down from 1.5% at the end of the previous year. This is because the government is implementing principal and interest repayment deferral measures for small and medium-sized enterprises and small business owners facing difficulties due to COVID-19.

With the repayment deferral measures scheduled to end in the first half of this year, concerns are growing that if the prolonged COVID-19 pandemic further suppresses economic activity, defaults among low-income and low-credit borrowers will increase, posing a risk factor for rising delinquency rates in card companies.

Reassessment of Merchant Commission Rates and Reduction of Maximum Interest Rates Also Have Negative Effects

The reassessment of merchant commission rates scheduled for this year is also a risk factor for the card industry. As the main source of income for credit card companies, merchant commission revenue has been declining, leading card companies to face deteriorating profitability. Merchant commission rates are adjusted every three years based on qualified costs, and the rates for credit card companies have been on a downward trend since 2015. The rates were lowered twice, in 2016 and 2019.

Furthermore, from the second half of this year, the statutory maximum interest rate will be reduced from 24% to 20%, which is expected to worsen revenues from cash services and others. Although cash services account for a small portion of total card company revenue, there are concerns that overall loan interest rates on loan-type card assets will be reassessed after the maximum interest rate reduction, potentially lowering card companies' profitability.

An industry official said, "Once the COVID-19-related financial support measures end, a burst of defaults could occur all at once," adding, "This year, with the reassessment of merchant commission rates and the reduction of the statutory maximum interest rate scheduled, concerns over declining profitability are growing."

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