MONEY FOR NOTHING, YOUR CRISES FOR FREE?: A COMPARATIVE ANALYSIS OF CONSUMER CREDIT POLICIES IN POST-1997
SOUTH KOREA AND THAILAND
Abstract: Both the South Korean and Thai governments encouraged consumer credit card usage to boost consumer spending and reinvigorate the national economy following the 1997-98 Asian financial crisis. Today, almost a decade following the crisis, the authors provide a comparative analysis of how policymakers in both South Korea and Thailand have attempted to regulate the rapid upsurge in consumer credit card debt in their respective economies. This Article also notes some of the benefits and risks of the approaches taken by the South Korean and Thai governments, using as focal points the South Korean government's Individual Debtor Rehabilitation Act, a personal debt relief program introduced by the Thai Ministry of Finance in 2005, and a series of Bank of Thailand credit card regulations.
Since the 1997-98 Asian financial crisis (“1997-98 Crisis”), South Korea [FN1] and Thailand have witnessed a rapid growth of the credit card industry and increasing levels of bad debt as a result of such growth. South Korea, in particular, has become a nation of massive credit card defaulters. In 2003, nearly ten percent of the entire Korean population (approximately four million individuals) defaulted on their personal credit card debts or loans. [FN2] Representative Lee Han-koo of South Korea's main opposition Grand National Party declared that one out of every 8.4 employed Koreans are credit defaulters, [FN3] despite strong government efforts to curb the problem. [FN4] In 2002-2003, Korean households held an average household debt of approximately 27,000 U.S. dollars (“USD”). [FN5] In 2006, Korea ranked second in credit card use (slightly behind Britain) with sixty-eight percent credit card use penetration, eighty-three million cards in circulation, and 3.6 trillion Korean won (“KRW”) (USD 3.6 billion) in transaction volume. [FN6] At the same time, new personal bankruptcy filings totaled 122,608 in 2006, nearly triple the previous year's total of 38,773 and a staggering ninety-fold increase from 2002, according to the Korean Supreme Court. [FN7]
Following the 1997-98 Crisis, the Korean government spurred consumer credit card use through two proposed solutions to boost domestic consumer spending. [FN8] The first government initiative provided incentives for consumers to use credit cards, such as a twenty percent income tax deduction for those whose credit card expenditures totaled more than ten percent of his or her annual income. [FN9] The second government initiative provided deregulatory incentives to consumer credit card issuing institutions, including the lifting of long-held restrictions against cash advances. [FN10]
Shortly after 1997-98, South Korea's economy experienced a decrease in consumer domestic spending. [FN11] Beginning in 1999, however, the government spurred consumer spending by promoting the use of credit cards. *3 As a result, consumer spending behavior dramatically changed so that individuals spent money on credit in a far greater proportion than ever imagined by policymakers and credit-lending institutions. This ultimately led to binge credit spending in the form of credit repayment delinquencies and debtor defaults. [FN12]
Similarly, Thai policy makers have widely acknowledged the key role that personal consumption and the liberalization of retail credit played in reviving the Thai economy after the 1997-98 Crisis. [FN13] Many have noted that Korea and Thailand share a broad pattern in that both are recovered economies driven in large part by domestic spending. Others have argued that the similarities between the two countries endorsing credit card spending as a main cure for the economy are limited in several respects. [FN14] Nevertheless, Thailand witnessed rapid growth in its domestic credit card industry from 2001 to 2003, the same time period in which South Korea also witnessed rapid domestic credit card growth. The year 2002 alone saw a 119% increase in the number of credit cards in circulation. [FN15] While growth has since slowed, the year-on-year number of cards in circulation climbed by fourteen percent in 2006 continuing a trend of annual double digit increases. [FN16]
Following such developments, and despite tighter regulations from the Bank of Thailand (“BOT”) to cope with such rapid growth, [FN17] observers ranging from research bodies [FN18] to Thai Prime Minister Thaksin Shinawatra, voiced concerns regarding the surge in credit card usage. [FN19] In October 2005, the Thai Ministry of Finance (“MOF”) unveiled an extremely controversial personal debt restructuring measure (“PDRM”) that was widely reported in the press as targeting a fifty percent reduction of debt principal and a complete interest write-off (i.e., 100%) [FN20] of qualified personal and credit card loans. [FN21] As reported, the PDRM would have wiped out seven billion Thai baht (“THB”) in debt principal and twenty billion THB in accrued interest [FN22] (approximately USD 675 million for the total debt amount of THB twenty-seven billion). [FN23] When subsequently released, though, the official text of the PDRM contained express language excluding credit card debt. [FN24] Nevertheless, during the period between the MOF announcement and the release of the official text, confusion existed regarding exactly which types of consumer debt the PDRM would cover and senior executives of Thai commercial banks gathered to voice their uniform concern relating to the potential for moral hazard. [FN25] As with Korea's Individual Debtor Rehabilitation Act (“IDRA”), [FN26] eligibility for the PDRM is limited to qualified individuals. By failing to include a steady salary as one of the criteria, the PDRM risks being yet another “restructuring opportunity” in which borrowers would still potentially be in debt at the end of the process.
[FNd1]. Associate Professor, Graduate School of International Studies (Ewha GSIS), Ewha Woman's University, Seoul, South Korea; U.S. Law Lecturer at the Judicial Research and Training Institute (JRTI) of the Supreme Court of Korea; and Co-director of the Center for American Legal Studies (CALS) for the Inje Institute for Advanced Studies in Seoul, Korea. Former investment banker (Associate Director) and lawyer (Associate Counsel) with Barclays Capital Asia Ltd. and Lehman Brothers Japan, Inc., respectively. The author would like to thank Moon-Yeong Choi, Jina Kim, Sang-yeop Lee, Mi-Sang Song, and Eun-Jeong Suh for their invaluable research assistance relating to this article. The author may be contacted at email@example.com.
[FNdd1]. Independent researcher based in Bangkok, Thailand. Attorney-at-Law, New York State Bar Association. Former Vice President, Global Real Estate and Structured Finance, Lehman Brothers Thailand Ltd. Former Associate Counsel (covering non-performing loans and related structured products), Lehman Brothers Japan Inc. Former Training Officer, Siam Commercial Bank Pcl. The author may be contacted at firstname.lastname@example.org.
[FN1]. For purposes of this article, “South Korea,” “ROK,” and “Korea” (and any derivation thereof) shall collectively refer to the Republic of Korea.
[FN2]. John Larkin, The House of Cards, Time, Dec. 1, 2003, available at http://www.time.com/time/magazine/article/0,9171,552170,00.html.
[FN3]. “Credit default” is defined as having over 300,000 Korean won (“KRW”), approximately 300 U.S. dollars (“USD”), in overdue debt for more than three months or, alternatively, having three “cases” upon which payments were overdue. Conversions from KRW to USD are calculated using the currency exchange rate of KRW 1000 per USD.
[FN4]. Yoon Ja-young, 2.9 Million Credit Defaulters Still Threat to Economy, Korea Times, Oct. 31, 2006.
[FN6]. Na Jeong-ju, Korea Ranks 2nd in Credit Card Use, Korea Times, Dec. 14, 2006 (stating that South Korea's credit card use was higher than use in the United States (65%), Hong Kong (58%), Singapore (44%), and Taiwan (36%)).
[FN7]. See Supreme Court of Korea website, http://www.scourt.go.kr/scourt_ en/Proceedings/t04_08/index.html. See also Bankruptcy Filings Tripled in 2006, JoongAng Daily, Jan. 8, 2007, at 5.
[FN8]. The government initiatives effectively created the consumer credit card market, given that one of the two initiatives involved the deregulation of cash advances, which is what credit cards were classified as prior to 1999.
[FN9]. See Larkin, supra note 2.
[FN11]. The reasons for this were twofold. First, many Koreans saw their purchasing power drop substantially during the 1997-98 Asian financial crisis (“1997-98 Crisis”), which directly translated into fewer consumer purchases. Second, many Korean industries during the 1997-98 Crisis were forced into bankruptcy, which increased unemployment rates and dramatically deflated consumer confidence. Thus, in the post-1997-98 Crisis economic environment, until 1999 when consumers faced the decision of spending now or not spending at all, consumers generally chose simply not to spend. After 1999, there was an increase in consumer spending. See generally, James Crotty & Kang-kook Lee, The Effects of Neoliberal “Reforms” on the Post-Crisis Korean Economy, 38 Review of Radical Political Economy 669, 672 (2006), available at http:// rrp.sagepub.com/cgi/content/abstract/38/4/669.
[FN12]. See Asian Development Bank, Asian Development Outlook 13 (2003), http://www.adb.org/documents/books/ado/2003/kor.asp.
[FN13]. See M.R. Pridiyathorn Devakula, Governor, Bank of Thailand, Address at the British Chamber of Commerce-Thailand Special Luncheon: Thailand: Recent Economic Performance and the Road Ahead, (Oct. 1, 2003), available at http:// www.bot.or.th/bothomepage/General/PressReleasesAndSpeeches/Speeches/english_ version/speech_Governor&deputyGovE.htm.
[FN14]. Yunyong Thaicharoen et al., Rising Thai Household Debt: Assessing the Risks and Policy Implications 56 (Bank of Thailand Discussion Paper, Nov. 2004).
[FN15]. In the fourth quarter of 2002, there were approximately 5.6 million cards circulated in Thailand compared with the fourth quarter of 2001 during which the number was approximately 2.5 million. Bank of Thailand, Financial Data of Commericial Banks, http://www.bot.or.th/bothomepage/databank/Financial_ Institutions/New_Fin_Data/CB_Menu_E.htm (scroll down to line 15 “Credit Card Data Classified by Types of Cards”; then select “(Q) 1999-2004” in that line's drop-down menu to download a spreadsheet containing the data) (last visited Dec. 3, 2007).
[FN16]. See Credit Card Usage in April Reaches 20.58%, Krungthep Turakij, June 13, 2006, at 13.
[FN17]. See The Bank of Thailand, Notification of the Bank of Thailand Re: Rules, Procedures and Conditions to Undertake Credit Card Business of Commercial Banks, dated Mar. 23, 2004; The Bank of Thailand, Notification of the Bank of Thailand Re: Rules, Procedures and Conditions to Undertake Credit Card Business of Credit Card Business Operators, dated Mar. 4, 2005 [hereinafter, and collectively, the 2004 BOT Regulation]. The first Notification is applicable to all local commercial banks and all branches of foreign commercial banks while the latter is applicable to all non-bank credit card companies. Although the latter Notification was issued in 2005, their substantive content is almost identical to each other and the authors think referring to them collectively should suffice our referencing purpose and will note otherwise when separation between the two is necessary.
[FN18]. See Chatrudee Theparat, NESDB Concerned About Debt, Bangkok Post, Mar. 21, 2005.
[FN19]. Prime Minister Thaksin Shinawatra, Radio Broadcast: Prime Minister Thaksin Meets the People (May 28, 2005) (during which the prime minister opined on current affairs).
[FN20]. For instance, assuming owed amounts totaling 400 Thai baht (“THB”) (i.e., THB 100 in principal and THB 300 in accrued interest), an individual qualified under the personal debt restructuring measure (“PDRM”) would need to pay only THB 50 prior to the loan's stated maturity date.
[FN21]. The title “Personal Debt Restructuring Measure” is the authors' translation of the official title in the Thai Language “Matrakarn Prab Krongsang Nee Pak Prachachoen” as there has not been an official English title of the measure at the time this Article was written. The use of the term “Personal Debt Restructuring Measure” is meant to capture a word-for-word translation of the Thai title, as well as distinguish it from other similar measures for which the title in Thai has already been officially translated into English, such as the “Corporate Debt Restructuring.” See Press Release, Ministry of Finance, No. 89/2548 (Oct. 18, 2005).
[FN22]. See Wichit Chantanusornsiri, Credit Card NPLs with State Banks to Get 50% Write-down, Bangkok Post, Oct. 6, 2005. See also Darana Chudasri & Wichit Chantanusornsiri, Banks Want Clearer Details of Latest Aid Scheme, Bangkok Post, Oct. 11, 2005.
[FN23]. Conversions from THB to USD are calculated using the relevant annual currency exchange rate of THB 40 per USD.
[FN24]. See Press Release, Ministry of Finance, No. 89/2548 (Oct. 18, 2005).
[FN25]. See Wichit Chantanusornsiri & Darana Chudasri, Banks Worry About Bad-Debt Habit, Bangkok Post, Oct. 5, 2005. The term “moral hazard” originates from discussion about insurance economics and is used in this Article to describe a situation when there is a lack of incentive to guard against risk where one is protected from its consequence. See Paul A. Samuelson & William D. Nordhaus, Economics 195 (16th ed. 1998).
[FN26]. As of March 24, 2006, the Individual Debtor Rehabilitation Act (“IDRA”) has been revised and incorporated into the wider-reaching coverage area of the Debt Rehabilitation and Debtor Act, which covers both individuals as well as corporate entities.