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The rise of another credit crisis - Views on News from Equitymaster
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  • Nov 23, 2009

    The rise of another credit crisis

    The Chinese have been traditionally considered as the thrifty lot who save for the future. And the wild western economies had a notorious reputation of being the ones that splurge. In short, while the Chinese saved over 40% of their income, Americans were happily binging on more than 90% of their income. But this was before the global economic meltdown. The trend is now seems to reversing. And we smell another crisis looming around the corner.

    While the credit meltdown was most severely felt in the US; the rest of the world did feel the aftershocks. But the Chinese seemed to have missed the lesson riding on the pace of economic recovery there. While the US consumers have at least started trying to reverse their gigantic credit card debt, credit card issuance has risen by more than 32% over last year in China. The unemployed Chinese youth is piling up huge amount of debt on multiple credit cards. Guess on what? In order to spend on food and fun. And the poor Chinese parents are now being chased by recovery agents.

    This is surely a bad news for China as well as the rest of the world. China is the biggest foreign owner of US treasuries and held around US$ 801 bn of that in September 2009. The figure was around US $ 1 trillion in March 2009. But now China is off-loading its dollar reserves. We agree that the dwindling significance of the dollar is one reason for this. But one cannot ignore the huge credit card debt that the Chinese are racking up. If China has to worry about its own debt, we wonder who will bail out the US?

    The picture is not all that rosy in India as well. The 8% plus GDP growth rate, emergence of fancy salaries and fancier malls to spend them had made Indians quite a spend-thrift. Indians have collectively amassed over 25 m of credit cards by end of FY09. Average spending by an Indian on credit card has increased to Rs 2,400 per month from Rs 1800 per month in the last 2 years. According to Indian Cards Council (ICC), the non-performing assets (NPA) on these credit cards have grown four folds. They stood at 20% this year as compared to 5%-6% last year. Though the frequency of usage and the purchasing power of Indian credit card holders are lower as compared to international standards, the annual credit losses on cards in India were about Rs 3,420 per active card while the same were Rs 3,070 per active card the US in FY09. Moreover, India also had a larger percentage (over 44%) of inactive cards as compared to economies like Australia (20%) and Singapore (25%).

    No doubt, the situation is getting worrisome. The credit card companies are wary about the same. They earlier aimed at garnering maximum market-share by offering free credit cards but are now going slowly on new issuances. They are blocking inactive cards to reduce the costs of communication and billing. They are also restarting to charge an annual fee for such cards as this will ensure higher number of active cards. It is expected to trigger more usage only by credit worthy consumers. Blocking all the cards of multi-card defaulters is a welcome move to curb NPAs. Banks are also tying up with employers to deduct dues at the source for employees who have defaulted on credit card payments. We believe these steps will go a long way in nipping at the bud any credit card bubble that could evolve. Let us hope that we learn the lesson before it is too late.



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