Desi Versus Videsi Credit
AMERICANS are falling behind on their credit card payments at an alarming rate, sending delinquencies and defaults surging by double-digit percentages in the last year and prompting warnings of worse to come. The country’s largest card issuers also found that the greatest rise was among accounts more than 90 days in arrears.....
At the same time, defaults — when lenders essentially give up hope of ever being repaid and write off the debt — rose 18% to almost $961 million in October, according to filings made by the trusts with the Securities and Exchange Commission......
Around 325 million individuals accounts are held in trusts that were created by credit card issuers in order to sell the debt to investors — similar to how many banks packaged and sold subprime mortgage loans.
Together, they represent about 45% of the $920 billion the Federal Reserve counts as credit card debt owed by Americans.
Source: Americans Tripping on Credit Card Payments, Economic Times
American banks distributed credit cards to all the Toms, Dicks, and Harrys just as they did with mortgage loans and of course, all those Toms, Dicks, and Harrys weren't hesitating to make merry. The good thing about subprime mortgage is that at least there is something material to back those loans, the property. Foreclosures can fetch the banks some money though substantially less than the actual loan amount (given they can get buyer for the property in a falling market). On the other hand, there isn't much value left in products bought by means of plastic money, i.e., burnt gasoline, beer and ham burger that went down the gastric tract, iPhones, those made in India Jeans and cotton shirts bought at high premium, etc. I don't see banks running behind customers with a portable commode in their hand to recover credit card dues from excreta.
With that said, the total money at risk is $920 bn out of which 45% has been securitized. That is around $414 bn has been taken out of banks books and no one knows (not me at least) in whose books they are lying. Now, the subprime crisis happened because people were not able to service mortgage when the interest rate climbed up to around 8%. The question is will those same consumers be able to service credit card loans at the interest rate of 36%. I don't know. May be Fed will come and baby feed them with some dollar bills. But if that doesn't happen, surely there will be defaults. Lets assume a conservative default rate of say 10% to 12%. With that in mind, the total bad credit card loan will be around $100 bn. You may add this figure to the present estimates of bad subprime loans of $500 to $700 bn and that's another 14% to 20% increase in irrecoverable loans in United States' book. Err... Not United States' book, rather world's book because yet no one is sure who owns how much of these dollars. May be your favorite Jaunpur National Bank of India owns some.
Note: The above have been written about in another blogs I read, calculated risk.
Now, the Indian story.
Bank gross NPA down to 2.5% of loans and advances in 2006-07
... The asset quality of banks has improved further last year and is reflected in the decline in their gross and net non-performing assets (NPA). An ET survey of 77 commercial banks finds that their aggregate gross NPA has declined by 1.2% in 2006-07 over 2005-06. The gross NPA as percentage of loans and advances has declined from 3.35% in 2005-06 to 2.52% last year....Source: Bank gross NPA down to 2.5% of loans and advances in 2006-07, Economic Times
And that happened in the backdrop of hardening interest rate and increasing credit card spend. Surely, Indian banks are managing their risks much better than their American counterparts.
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