Editorial: Controlling credit-card use

The more stringent rules Bank Indonesia will enforce on the issuance of credit cards and credit-card use and debt collection starting next January will stop the reckless promotion of such plastic payment cards by banks and impose a higher spending discipline on consumers.

The new regulation that limits the issuance of credit cards to those with a minimum take-home pay of Rp 3 million (US$333), sets the credit limit to a maximum of three times the monthly income of the holder and limits the number of credit cards to a maximum of two issuers does make sense.

We welcome the new rules even though the credit card problem in the country has not yet reached the magnitude of the crisis in South Korea in the early 2000s, which required tens of billions of dollars in bailout funds and caused several personal tragedies.

Even though the number of issued credit cards in the country has risen dramatically to more than 14.6 million as of last year and credit card billings reached Rp 165.6 trillion last year, the economic toll and social tragedy associated with personal debt have not reached a critical level.

Latest figures showed the incidence of bad debts among credit-card users is still fairly small, amounting only to 4.60 percent as of November. But that bad debt level was much higher than that in 2005, which was only about 2.5 percent.

But we cannot help but relate the more stringent rules to the tragedy last March, whereby a credit card holder who owed around Rp 100 million in debt to Citibank in Jakarta died after meeting with debt collectors.

However, the condition could worsen rapidly if the central bank does not put a higher discipline on the issuance and use of credit cards, given the aggressive sales campaign banks have made to put credit cards in their customers’ hands.

A crisis could even be in the offing if banks are allowed to continue their reckless sales practices amid the fierce market competition, overlooking the credit risk and offering cards to just anyone who can produce an identity card and wage slip. The central bank should rein in such aggressive marketing practices because they are totally against prudent risk management.

Given the economic slump in Europe and the United States, there is also a big temptation for the government to further boost private consumption, including spending binges through credit cards, to stimulate growth.

The new credit-card regulation will also protect consumers from excessive interest charges by banks and help prevent excessive personal borrowing by prohibiting the use of credit cards to repay other loans.

However, Bank Indonesia still allows adequate leeway for fair and open market competition to thrive in the credit-card business because its regulations on the restrictions on the credit card use, credit limit and the number of credit cards per customer are effective only for customers with monthly take-home pay of Rp 3 to Rp 10 million.

The restrictions are not applied to customers with monthly incomes of more than Rp 10 million but bank issuers are still required to strictly enforce the central bank directives on risk management to their whole credit card business.

That is a good balance between the need of free market and the protection of consumers.