South Korea's infatuation with easy credit has reached a similarly nasty finale.
A government program instituted in 1999 to stimulate the domestic economy by getting thrifty citizens to borrow and spend has been too successful. Today, every working South Korean has on average four credit cards—and some 2.2 million people are behind on their payments, having rung up a staggering total of about $100 billion in credit-card debt. That's $2,000 in debt for every Korean, an amount equal to roughly a quarter of the country's annual economic output.
Bad accounts have mounted so quickly at card companies that the country's largest issuer, LG Card, recently nearly ran out of money and had to temporarily suspend its ATM cash-advance service. LG was bailed out last week with a $1.69 billion emergency loan package provided by its creditors, mainly banks. LG isn't the only issuer in trouble. Of South Korea's nine major card companies, eight lost money in the first half of 2003; losses at Samsung Card, the country's second-largest issuer, totaled $850 million in the first nine months of the year. Two banks, Korea Exchange Bank and Woori Financial, recently announced rescue plans for their stricken card units. A chain of collapses is unlikely. But to some observers, the situation is disturbingly like the near meltdown of South Korea's financial system in the late 1990s. "The scale [of card-company losses] is not insubstantial," says Hank Morris, an analyst with IRC Consulting in Seoul. "You're talking about real money here."
Credit cards became widely available to Koreans only four years ago. Economic policymakers, trying to reduce their export-driven economy's dependence on the U.S., implemented measures that encouraged banks and card companies to increase lending to consumers. Anyone who ran up expenditures totaling more than 10% of his annual income on credit cards was granted a 20% income-tax deduction, and long-standing restrictions on cash advances were abolished. The situation was a bonanza for card companies and banks. Miniskirted girls peddled cards on street corners, offering free plush toys and kitchen knives to new applicants.
The economic stimulus worked. Koreans went on a spending binge. Private consumption jumped by more than 17% to $291 billion in 2002, pumping up the domestic economy. South Korea's economic growth nearly topped the region, at 10.9% in 1999 and 9.3% in 2000.
Then came the hangover. Household savings rates, as high as 23% of disposable annual income in 1998, plummeted to less than 10% last year while household debt, which includes personal loans and credit cards, soared by 30% last year to $365 billion. South Korea lapsed into recession in the first half of 2003, which made it harder for consumers to pay their bills on time. Unlike most credit-card markets, Korean lenders do not offer revolving credit, which allows borrowers to pay off their debt over months or even years. Instead, balances must usually be paid in full after just 30 days, making it easy for consumers, who pay 25%-plus annual interest rates, to fall behind.
Delinquencies are also soaring because banks and card companies frequently fail to properly assess credit risk, offering cards to just about anyone who cares to fill out an application. Privacy laws make it difficult for companies to share credit information on individuals in South Korea. Access to information is improving, but it's still not possible to verify applicants' incomes. A Seoul cosmetics salesman (who requested anonymity) applied for most of his five cards on street corners, and he says the only check was a phone call to him at his office. He's now $42,000 in debt. "Koreans ate a poison pill," says Kim Kyeong Won of the Samsung Economic Research Institute. "It tasted sweet at the time but was still poison."
The search is on for the antidote. At a high-rise building in central Seoul, hundreds of debtors recently waited for interviews at a new government agency, the Credit Recovery Supporting Service, set up to help them reschedule their debt. So far 17,000 people have had their burden eased—a fraction of total defaulters. Meanwhile, in a dingy suburb across town, the agency holds 90-minute cash-management classes. The teacher, former banker Kim Seung Duck, loudly exhorts borrowers to embrace the habits of the rich by "loving money and saving." Under the white glare of fluorescent lights, middle-aged women scribble down his instructions while younger classmates doze. "My students are generally uneducated about money," says Kim. "It's difficult, because Asian parents think it's their duty to give money to their kids."
Meanwhile, President Roh Moo Hyun's administration is pressuring lenders to improve their risk-assessment practices—and urging deadbeats to pay up. In mid-November, the Finance Ministry suggested that companies looking to hire new workers should deny employment to job seekers with a bad credit history. "People who don't pay should be punished," says Byeon Yang Ho, the ministry's director of financial policy.
But the government's message is decidedly mixed. Cracking down too hard on debtors could throttle economic growth. After encouraging citizens to binge borrow, the government is now in effect making it possible for some to walk away from their obligations. The Korea Asset Management Corporation (KAMCO), a public agency set up after the Asian financial crisis to dispose of bad corporate debt, recently assumed $5.48 billion in delinquent accounts from shaky card companies. KAMCO plans to write off up to 30% of the principal, extend the payment periods to a maximum of eight years and redeem the credit records of debtors. Some card companies have started their own debt-forgiveness programs; these have the unintended consequence of creating an incentive for borrowers to stall for a bailout rather than pay up. "Some debtors are telling our phone operators that they're not going to pay their debt," says Kim Young Son, director of credit-card risk management at Kookmin Bank. "There is a serious case of moral hazard breaking out."
Indeed, debtors have set up websites to share tips on how to dodge payment, even how to get loans and new cards while deep in hock. Collecting bad debt is already a headache for lenders, because card debt is unsecured. Solomon Credit Information, a Seoul collection agency, says that only 0.5% of bills more than six months overdue are ever repaid and that recovery is costly in any case."If you lend $20,000 to someone, you can spend the same amount to get it back," says Brendan Carr, an American lawyer with Aurora Law Offices in Seoul. "It's a sucker's game."
With general elections only five months away, a wholesale crackdown on deadbeats is unlikely. Most debtors are less than 40 years old, precisely the demographic the Roh administration needs to claim a majority in the National Assembly. Forgiving the debt of youthful voters might swing more of them to Roh's side. Says Jinsang Kim of HSBC Securities in Seoul: "What we have is the carrot without the stick."
Choi Pyong Jin, the online bowling-ball salesman, is hoping his business will improve so that he can pay off his bills—but if the government is willing to forgive his debt, he'll happily accept a bailout, he says. For now, he gets 30 calls a day from card companies demanding payment. Taking three calls in the course of an hour, he pretends to be someone else and takes a message. Whether you are a South Korean credit-card company, a corporate conglomerate or a citizen, sometimes the best strategy is to sit tight and wait for someone to ride to your rescue.