VZCZCXYZ0012
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DE RUEHIN #0711/01 0662339
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R 072339Z MAR 06
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UNCLAS AIT TAIPEI 000711 
 
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E.O. 12958: N/A 
TAGS: EINV EFIN ECON PINR TW
SUBJECT:  Freeing Taiwan's "Card Slaves" 
 
Ref: 05 TAIPEI 4178 
 
¶1.  (SBU) Summary: Overdue credit card debt and the absence 
of a personal bankruptcy law has led to a few high-profile 
cases where Taiwan "card slaves" chose suicide or crime as 
their only options to escape aggressive harassment from debt 
collection agencies.  While the overall amount of delinquent 
card debt in Taiwan is not large, and declining, the plight 
of the card slaves has captured public and government 
attention.  Local and foreign banks are concerned that some 
of the proposed solutions may have a negative impact on 
Taiwan's financial sector and GDP growth.  End summary. 
 
Taiwan's Card Slaves 
-------------------- 
 
¶2.  (SBU) Widespread use of credit and cash cards is a 
relatively recent phenomenon in Taiwan.  The push by banks 
to expand this profitable market has resulted in some 
inexperienced consumers being overwhelmed by their debt. 
Fifty-fiveThe 55 financial institutions issuing cards in 
Taiwan operate card businesses and have issued enough cards 
for every adult in the population to each have four or five 
cards.  The institutions have targeted young people in their 
ad campaigns, in part because they lack their parent's deep- 
seated distaste for using credit.  In their haste to expand 
credit-card use checks, institutions often failed to check 
whether or not they were issuing cards to people already 
running up debt on cards issued by their competitors.ignored 
the fact that their competitors were issuing cards to the 
same people.  Young people were particularly targeted to 
receive cards, in part because they lacked older 
generations' deep-seated distaste for using credit to make 
purchases. 
 
Card Debt Fueled by Drive to Lower Bank NPLs 
-------------------------------------------- 
 
¶3.  (SBU) The problems associated with card debt in Taiwan 
were also, ironically, fueled by the successful efforts to 
reduce the level of non-performing loans at Taiwan banks, 
according to local bank executive.  As banks tightened 
lending standards for commercial and consumer loans, some 
consumers and small businesses denied bank loans turned to 
readily available credit card financing instead.  The 
retreat from consumer loans, in turn, left banks eager for a 
new source of revenue. 
 
¶4.  (SBU) Card debt write-offs by Taiwan banks increased 
sharply due to card- issuing banks trying to meet new, 
stricter non-performing loan (NPL) standards imposed by bank 
regulators, reported reftel.  The banks sold most of this 
delinquent card debt to asset management companies, which in 
turn hired debt collection agencies to pursue payment. 
 
Banking Bureau Claims Not a Serious Economic Problem 
--------------------------------------------- ------- 
 
¶5.  (SBU) At the same time, the amount of card debt was 
continuing to grow rapidly.  Financial Supervisory 
Commission (FSC) Banking Bureau data showedI don't want to 
cite a specific individual in an unclassified cable.)  that 
the rapid growth of card accounts were driven by the 
handsome profits originating from card services, and the 
large volume of write-offs showed Taiwan bank had sufficient 
profitability to deal with bad debts.  The data showed that 
overall card holder debt remained relatively small and 
unlikely to seriously impact overall consumer spending.  It 
showed that cumulative lending to cash card holders as of 
August 2005 was only NT$312 billion, less than two percent 
of total bank loans (NT$16.5 trillion). 
 
¶6.  (SBU) According to FSC figures, in December 2005, the 
average non-performing loan ratios for credit and cash cards 
were only 2.4% and 1.8%, respectively, both lower than in 
many economies in the region and comparable to the levels in 
the United States.. 
 
But Aa Huge Social Problem 
------------------------- 
 
¶7.  (SBU) While the amount of debt may have appeared minor 
in strictly financial terms, local media and politicians 
have uncovered numerous dramatic stories highlighting the 
plight of card slaves.  Newspaper readers were treated to 
accounts of Taiwan university students forced to serve as 
sex workers in Japan, or as surrogate mothers, or to rob 
banks in order to pay off credit card debt.  The media 
reported on the heavy-handed harassment of debtors by debt 
collection agencies, including threats of physical harm, 
dozens of phone calls throughout the day and night, and 
threatening calls to relatives of the debtors.  Bankers have 
admitted to AIT that one of the most effective means of 
recovering debt from young people is to tell their parents 
of the problem.  While the collection agencies used by the 
banks are regulated to some extent, the collection agencies 
used by asset management companies are not regulated and are 
reportedly linked to criminal gangs. 
 
¶8.  (SBU) The issue shot to an even higher profile in late 
2005, when an aide to outspoken Independent Legislator Lee 
Ao reportedly killed herself to avoid harassment by a 
collection agency.  Lee Ao and KMT Legislator Hsu Chung- 
hsiung urged the Legislative Yuan (LY) to take measures to 
protect consumers.  Taiwan's LY began discussions in 
December 2005 of an amendment to Taiwan's Banking Act that 
would cap the maximum interest rate that could be charged on 
revolving debt and restrict the spread (difference) between 
the rate banks charge their customers and the rate banks pay 
for funds. 
 
What Worries Bankers 
-------------------- 
 
¶9.  (SBU) The Banking Act amendment proposed in December 
would have limited the rate banks can charge on unsecured 
loans (specifically cash card and credit cards) to 10 
percentage points over the average one-year deposit rate in 
Taiwan; about 8 percentage points lower than the highest 
rates banks had been charging.  The proposed amendment would 
have required banks to raise the minimum monthly repayment 
on card balances to 10%.  Both foreign and local banks 
criticized the anti-market impact of the bill, which 
contradicted the official policy of reliance on market 
mechanisms, and which could damage Taiwan's financial 
reputation.  In response to the criticisms, the LY agreed to 
put the amendment on hold if the banks adopted "voluntary" 
measures to better protect the interests of their creditcard 
and cash card customers. 
 
Taiwan Bankers Association "Voluntary" Measures 
--------------------------------------------- -- 
 
¶10.  (SBU) The Taiwan Bankers Association (TBA) in late 
December 2005 drafted a set of debt rescheduling guidelines, 
modeled on U.S. practices.  The guidelines require banks to 
set a minimum monthly payment of 10% of the credit card bill 
incurred the previous month, but permit banks to keep their 
minimum monthly repayment at 2-5% of the total credit card 
balance.  The new TBA guidelines also create a system that 
will bar future bank loans to debtors who reschedule 
repayments.  The bar remains until the debtors repay all of 
their debt.  For delinquent debtors (those failing to make 
the minimum monthly payments), banks will permit repayment 
of debt in 80 installments without interest charges if the 
outstanding unsecured debt exceeds 25 times their monthly 
income, or in 60 installments with an interest rate of 3.88% 
if the outstanding unsecured debt is 17-25 times their 
monthly income.  The guidelines do not permit delinquent 
debtors to reschedule their debt repayment if their 
outstanding unsecured debt is less than 17 times their 
monthly income.  The guidelines also permit debtors repaying 
normally to reschedule repayment if their outstanding debt 
exceeds 25 times their monthly income. 
 
Taiwan's Credit Rating System 
----------------------------- 
 
¶11.  (SBU) The executive branch, faulted by the media and 
legislators for not adequately protecting Taiwan consumers, 
has been scrambling to show that it too cares.  In February, 
Taiwan's FSC instructed the Joint Credit Investigation 
Center to follow the U.S. FICO (Fair Issac Corporation, 
which produces the FICO Score, the most widely used consumer 
credit score) model to create a reliable credit assessment 
system to rate Taiwan consumer banking customers.  The FSC 
has proposed that banks differentiate the interest rates 
charged to customers based on their credit rating.  In 
addition, the FSC has already ordered banks to stop offering 
incentives and prizes for new creditcard and cash card 
customers.  However, one American banker said the problem is 
not that Taiwan lacks a good credit rating system, but that 
many smaller banks simply didn't bother to check credit 
histories. 
 
Personal Bankruptcy Law Needed 
------------------------------ 
 
¶12.  (SBU) Since Taiwan Premier Su Tseng-chang said on 
February 21 that dealing with "card slavery" is one of the 
government's most urgent tasks, other government agencies 
are also trying to get in on the act.  The Judicial Yuan 
wants to revise the Bankruptcy Law to add provisions for 
personal bankruptcy, but so does the Ministry of Economic 
Affairs.  Both agencies now claim jurisdiction. 
 
¶13.  (SBU) However, bankers worry that the a new bankruptcy 
law may make it too easy for people to declare bankruptcy 
and too easy for them to reestablish a positive credit 
rating after bankruptcy.  Bankers point to the 2005 changes 
made to U.S. bankruptcy law to make declaring bankruptcy 
more difficult. 
 
Conclusion 
---------- 
 
¶14.  (SBU) The legislature has set aside the Banking Act 
amendment proposed in December that would limit interest 
spreads, and banking stocks have recovered losses incurred 
at that time.  However, there is still likely to be some 
form of new banking legislation designed to better protect 
consumers.  One of Taiwan's legislators explained to AIT 
that the current bankruptcy law was drafted over 40 years 
ago and only allowed corporate bankruptcy.  At that time, 
she said, unsecured consumer loans were unheard of in 
Taiwan.  The current situation, she continued, gives 
consumers no way to escape from high-interest rate debts 
that they have no hope of ever paying off, and has driven 
some consumers to take desperate measures, including 
suicide. 
 
¶15.  (SBU) However, some bankers still worry that the main 
impact of these consumer protection measures would be to 
make it harder for consumers to get bank credit.  Tighter 
bank credit would benefit illegal lenders, and the sharp 
increase in card cancellations could dampen Taiwan's private 
consumption and economic growth.  Legislation that makes it 
harder to collect debt might lower the overall credit rating 
given to Taiwan's financial sector.  The competing interests 
of creating a competitive financial sector and protecting 
consumers must be carefully balanced. 
 
KEEGAN