Swelling business

Behind the mounting credit card related risks is the rapid growth of plastic purchase in China, as more and more Chinese realized the advantage of credit consumption and began to pay through credit cards.

Chinese banks have so far extended 1.8 billion bank cards, including over 150 million credit cards, said Xu Luode, president, China Unionpay, the only domestic credit card organization in China. That compares to the 3 million credit cards issued by 2003.

With the expanding credit card business market in China, commercial banks have also seen their card business related income booming in recent years.

China Merchants Bank (CMB), the country's sixth largest lender and one of the few banks which issue details of their credit card business, generated 1.85 billion yuan as interest income and 2.28 billion yuan in non-interest income from its credit card business in 2008, up 70.3 percent and 50.2 percent respectively from a year ago.

Loopholes

China's fledging credit card market began to balloon after 2000, when commercial banks were racing to issue new cards in a bid grab a bigger share of the market. They handed out credit cards by lowering issuance requirement and loosening credit record checks, thereby sowing the seeds for more defaults in future.

Scamsters easily lure credit card holders as Chinese banks levy a fixed 18.25 percent annual percentage rate for cash advances.

"The credit card delinquency rate at Chinese banks has surged to about 3 percent, tripling from 1 percent two years ago," said Guo Tianyong, head of the research center of the Chinese banking industry with the Central University of Finance and Economics.

Although there is not much data showing how much of the credit card defaults are caused by malicious cash withdrawals at POS machines, Guo warned it was necessary to give special attention to such illegal activities and strengthen supervision on credit card issuance.

At the same time, banks were also not prudent in allocating POS machines, analysts said. "Even a bogus company which does not do any real business could obtain a POS machine. Indeed, its only 'business' is making money from helping cardholders get cash through a POS machine business transaction that never took place," Guo said.

Analysts said the best way to prevent such instances is to keep strict tabs on cardholders and POS machine clients and also strengthen the supervision mechanism.

Another pitfall in the supervision system is the absence of a clear judicial interpretation on how to handle such cases, according to a source with China Unionpay who declined to be identified. It is necessary to draft relevant laws as soon as possible to solve this issue, the source said.

Bank insiders who are familiar with the credit card business said the high costs that banks need to pay to trace their mammoth credit card business data in order to catch the culprits is the deterrent. Until then people like Zhang Ran will continue to make hay.

(China Daily June 16, 2009)