US embassy cable - 05TAIPEI4178

UNCLAS SECTION 01 OF 02 TAIPEI 004178 
 
SIPDIS 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/TC, EAP/EP 
 
USTR FOR WINTER AND WINELAND 
 
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER 
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT 
TREASURY FOR OASIA/LMOGHTADER 
TREASURY PLEASE PASS TO OCC/AMCMAHON 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EINV, EFIN, ECON, PINR, TW 
SUBJECT:  Taiwan's Cash Cards 
 
 
SUMMARY 
------- 
 
1.  Cash card debt write-offs by Taiwan banks have increased 
sharply since June of this year mainly due to card-issuing 
banks trying hard to live up to a new, stricter non- 
performing loan (NPL) definition.  Some observers worry that 
the sharp increase in cash card cancellations could create a 
credit crunch that could dampen Taiwan's private consumption 
and economic growth.  Meanwhile, the value of loans to cash 
card accounts continues to grow rapidly.  END SUMMARY. 
 
What are Cash Cards? 
-------------------- 
 
2.  In addition to credit and debit cards, many Taiwan banks 
offer "cash card" arrangements under which consumers borrow 
money from the bank at an interest rate much lower than that 
offered on credit cards and agree to make set monthly 
payments to the bank to repay the loan.  The cash card 
provides access to the borrowed money at ATMs and at most 
places that accept credit cards.  For Cosmos Bank Taiwan, 
the largest issuer with a 25 percent market share, the cash 
card business contributes over 60 percent of the bank's net 
profits.  However, a recent Fitch ratings report indicated 
that many Taiwan cash and credit card lenders are losing 
money because of their high operating costs, small client 
base, and poor risk management. 
 
New Definition for NPL 
---------------------- 
 
3.  In July this year, Taiwan's Financial Supervisory 
Commission (FSC) adopted a new policy that defines NPLs as 
loans overdue three months or more.  Prior to July 1, a loan 
was non-performing if no principal or interest payments had 
been made for six months. 
 
Sharp Increase in Write-offs 
----------------------------- 
 
4.  The change in the NPL definition, together with strong 
FSC pressure on banks to keep their NPL ratio below three 
percent, has forced cash-card issuers to write off large 
amounts of bad debt beginning mid-2005.  Write-offs in May 
2005 posted a moderate growth of 4% from a year ago to 
NT$877 million.  The growth in subsequent months shot up to 
189% in June, 112% in July, and 210% in August. 
 
5.  Under the old NPL definition, no cash-card issuers 
posted cash card NPL ratios above the FSC-set 3% limit in 
June 2005.  However, after the change in overdue policy, 
five banks were penalized for crossing the 3% limit in July. 
In August, the number of banks violating the 3% NPL ratio 
limit declined to three. 
 
Credit Crunch? 
-------------- 
 
6.  In recent reports, foreign financial analysts have 
expressed concern that the new FSC policy could contribute 
to banks being less willing to offer consumer credit and 
that, in turn, could dampen private consumption and economic 
growth.  The "Financial Times" recently reported that the 
lack of credit growth "is pushing" Taiwan into a credit 
crunch of the sort suffered by South Korea in 2002-3. 
 
7.  In spite of the Financial Times article, most local 
observers believe the background of South Korea's 2002-3 
credit crises was much different from Taiwan's current 
situation.  By writing-off bad debt, Taiwan banks have been 
able to continue to expand their cash-card services. 
Revolving balances of cash-card accounts grew 53.5% in July 
and 50.3% in August. 
 
8.  Our FSC contact told AIT that the rapid growth of cash 
card accounts reflected the handsome profits originating 
from cash card services, and that the large volume of write- 
offs represented Taiwan banks' sufficient profitability to 
deal with bad debts.  The FSC contact stressed that 
outstanding loans offered by banks to cash card holders 
remained relatively small and unlikely to seriously impact 
overall spending.  He noted 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). 
 
PAAL