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Regulate credit cards

(China Daily)
Updated: 2009-07-20 07:48

A blanket ban that the China Banking Regulatory Commission announced on issuing credit cards to students under the age of 18 does not mount to an adequate response to the rising default risks in the credit card market.

Improved regulation of the credit card market requires China's banking regulator to press commercial lenders to carefully assess creditworthiness before issuing cards while encouraging innovations to improve consumers' advantages.

The number of credit cards in China has almost tripled in the last three years to 150 million by the end of March this year because of both aggressive promotion and more adaptation to credit consumption.

As the credit card business becomes an increasingly important source of revenue, domestic banks vie with one another to issue as many cards as possible. Some even made the number of new cards a measure of performance.

It was under such circumstances that domestic banks began to offer credit cards to students though most of them do not have a steady income.

A recent report by the People's Bank of China found that credit card debt, which is at least six months overdue, surged 133.1 percent in the first quarter from a year early to 4.97 billion yuan.

That sum looks tiny compared with new loans worth trillions of yuan that Chinese banks have lent so far this year. And, it has seemingly not even made a dent on the balance sheet of banks. By the end of June, commercial banks in the country have managed to cut down the total of non-performing loans by 42.2 billion yuan from the beginning of this year.

Nevertheless, commercial lenders still cannot afford to ignore the potential risk of overdue credit card debt. The explosive expansion of the market can lead to an upsurge in defaults that will hurt both banks and consumers in the absence of due diligence before the cards are issued.

The successful operation of student credit cards in other countries indicates that the business does not have to be a bad one. To a certain extent, it is just a financial invention that offers both benefits and risks. And, if properly administered, it adds to both consumers' welfare and banks' profits.

Denying credit cards to all students under the age of 18 regardless of their varying financial condition will spare banks the trouble of identifying the creditworthy but entail loss of revenue.

If the credit card market is to be further explored, the banking regulator should focus on correcting the skewed incentives commercial lenders adopt for expanding such business.

Besides, concrete efforts are also needed to safeguard consumers against complex financial products (which are open to abuse), that people cannot understand easily and use properly.

(China Daily 07/20/2009 page4)