[Opinion] Concerns Over COVID-19 and the Deterioration of Credit Card Companies' Soundness

Seo Ji-yong, Professor, Department of Business Administration, Sangmyung University

These days, the spread of the novel coronavirus is a matter of intense national concern. Since the viral respiratory disease that originated in Wuhan, China last year began spreading worldwide from January this year, anxiety has been escalating. Due to South Korea's geographical proximity to China, the entire nation is suffering from the threat posed by the coronavirus to public health. However, there are also concerns about the negative impact of the prolonged coronavirus situation on the domestic financial sector.

The domestic economic downturn caused by sluggish private consumption is expected to negatively affect the soundness of credit card companies, which provide household credit and payment methods. Consumers, fearing second and third waves of infection, are focusing more on online purchases and payments rather than offline, leading to a severe decline in sales for self-employed businesses. Income reductions among low-credit groups, including small self-employed business owners affected by the economic recession, could lead to loan delinquencies and defaults. Moreover, since the first half of last year, the implementation of the Debt Service Ratio (DSR) regulation on financial institutions serving low-income households, including credit card companies, has worsened the funding conditions for low-credit borrowers. Because the total annual repayment amount of household loans borrowed from all low-income financial institutions must be managed within the regulated ratio relative to annual income, liquidity supply to low-credit borrowers may decrease. In other words, this limits the use of loans from savings banks or capital companies to repay card loans. This suggests that if the economic downturn prolongs while funding sources are blocked, there is a possibility of worsening delinquencies or defaults on existing loans.

Recently, credit card companies have been providing financial support to small merchants suffering from domestic demand contraction due to the coronavirus spread by shortening payment cycles and delaying billing of payment amounts. Some card companies allow small merchants to defer credit card usage payments for up to three months and plan to suspend debt collection for up to six months even if payments are overdue. While the efforts of card companies to coexist with merchants shine as a response to the crisis caused by the coronavirus, concerns about the deterioration of card companies' soundness are growing.

In fact, since the implementation of the DSR, warning signs have appeared regarding the soundness of card companies. In the third quarter of last year, the non-performing loans (NPL) of eight major credit card companies increased by a staggering 21.1% compared to the same period the previous year. Additionally, the total overdue amount (over one month) at that time also rose by 4.3% year-on-year. While attention was focused on improving the profitability of card companies amid the recession, warning lights regarding soundness were also triggered. Ultimately, the prolonged coronavirus situation is likely to accelerate the deterioration of card companies' soundness.

The deterioration of card companies' soundness leads to increased risk management costs and funding costs. An increase in the size of non-performing loans inevitably results in higher provisions for loan losses. This could significantly impact the cost-cutting efforts of card companies, which have been striving to reduce card recruitment expenses to improve profitability. Furthermore, a decline in card companies' soundness may negatively affect their credit ratings. If credit ratings fall, given that card companies do not have deposit-taking functions, the increase in risk premiums could raise the interest rates on issued card bonds, thereby increasing funding costs. An increase in funding costs could have a fatal effect by eroding profit margins.

In conclusion, card companies, which are focused on improving profitability, are now faced with the additional challenge of maintaining soundness. It would be problematic if efforts to improve soundness were left solely to the card companies. Unreserved support from financial authorities is necessary. The government has already decided to supply about 2 trillion won in policy funds to small and medium-sized enterprises and small business owners. However, urgent measures are needed to create conditions that encourage voluntary financial support from private financial companies such as card companies. It is necessary to actively consider temporarily suspending measures such as strengthening provisions for high-risk loans currently in effect through the 'Strengthening Soundness Management Measures for the Secondary Financial Sector' announced in the first half of 2017 (e.g., an additional 30% provision for multiple borrowers using two or more card loans) and shortening the classification criteria for non-performing loans from over six months overdue to over three months overdue.

[Seo Ji-yong, Professor, Department of Business Administration, Sangmyung University]