Thailand Law Journal 2009 Spring Issue 1 Volume 12

This Article's main research objective is to provide a comparative analysis of the regulatory approaches relating to consumer credit policies in both post-1997 Thailand and South Korea to determine whether Thailand's  “preemptive” method as reflected in the 2004 BOT Regulation or South Korea's “bailout” method as reflected in the IDRA represents a more effective approach in terms of mitigating the surging problem of individual credit defaults found in both economies. After providing an introduction to the parallel rises in popularity of credit card usage, the noticeable shift in consumer spending cultures, and a general description of the spending hangovers that followed the 1997-1998 financial crises, this Article will proceed as follows. First, a comparison will be made between the Korean and Thai regulators' efforts to cope with the credit card boom phenomenon, with specific focus given to the IDRA and its stated objectives versus the 2004 BOT Regulation, highlighting the similarities as well as differences in the regulatory approaches between the Korean government's IDRA and the Thai Ministry of Finance's PDRM. Second, a policy analysis evaluating the IDRA's approach will focus on significant similarities or differences in the 2004 BOT Regulation and the PDRM in Thailand. This Article concludes that, based on the evidence, Thailand's “preemptive” approach may prove preferable in terms of a legislative solution to the consumer credit card epidemic. This is due to the fact that a “preemptive” approach appears to be more effective at alleviating the consumer credit problem, may represent a better use of tax revenue, and may provide for a better investment climate as a result of its relatively non-interventionist approach. More broadly, this Article also notes some of the relevant regulatory risks associated with both the Korean and Thai post-1997 consumer credit policies. The result of our examination of these risks suggests that they could potentially increase the likelihood of destabilizing both the Asian and the international financial markets due to issues of moral hazard and unnecessary market intervention.

II.Government Intervention vs. Free Market Solutions: A Relevant Question for South Korea and Thailand

The issue of whether or how a government may regulate the increased availability of loans to borrowers with bad credit histories as a result of a specific public policy has always been a primary concern among policy makers and academics alike. [FN27] However, as our survey below concludes, there has yet to be any academic literature that deals directly with this issue, particularly in the context of credit card markets in South Korea and Thailand. Thus far, no literature currently exists that deals with individual credit defaulters from a legal and policy perspective within the South Korean context in the post-1997 period. Existing research separates the credit defaulter problem from the credit card corporation delinquency problem, and generally focuses on credit card corporation delinquency in relation to South Korean macroeconomic growth. For example, Choi (2004) argues that stimulating macroeconomic growth by encouraging credit card companies to rampantly issue credit cards was not sound economic policy. [FN28] Choi discusses several government policies intended as countermeasures, but does not focus on the legal issues embedded in these policies. Similarly, the Korea Institute of Finance analyzed Korean government policy relating to credit card defaulters, and argued for the greater use of revolving credit card lines (which is common in the United States, but currently not widely adopted in South Korea) along with related structural reforms. [FN29] Finally, Oh (2004) discusses the IDRA, but only in the context of a practical guide for interested credit defaulters who are seeking IDRA protection. [FN30]

As for Thailand, many studies explore the merit of consumer-led recovery as one of the necessary strategies for a successful Thai economy and address the subsequent rise in consumer debt following the 1997-98 Crisis. For example, Chaipravat and Hoontrakul (2000) discuss the problems encountered by the Thai credit market after the 1997-98 Crisis, and identify the personal consumption and liberalization of retail credit as one major policy proposal among others that was responsible for the Thai economy's recovery after 1997. [FN31] However, their paper does not discuss the ramifications of policy initiatives fostering a consumer-driven recovery.

Even fewer studies have sought to explicitly compare Thailand's initiatives with the responses of foreign counterparts facing similar challenges, such as South Korea. A recent BOT Discussion Paper by Thaicharoen, Ariyapruchya and Chuched (2004) discusses rising household debt in Thailand, focuses on the risks and policy implications arising from increasing household debt, and compares credit card market developments in South Korea and Thailand. [FN32] While the Discussion Paper concludes that the Thai regulators have taken a more cautious approach to cope with the increasing popularity of credit card usage, the Korea-Thai comparison is brief and expressly limited to identifying and suggesting the rise of house hold debt as a macro-economic threat. It neither evaluates nor discusses in detail the 2004 BOT Regulation or related efforts by the BOT to cope with mounting credit card debt; its limited comparison of Korean and Thai policies is one component of a more general discussion of risks stemming from high household debt. Finally, although the PDRM generated much controversy when it was announced by the MOF in October 2005, its implementation is recent and there is no current academic literature that deals directly with the PDRM as part of a continuing governmental effort to bail out consumer loan debtors. While Thailand's PDRM expressly excludes credit card debtors, this Article suggests that the differences and similarities in their theoretical approach and procedural character merit a comparison with South Korea's IDRA.

This Article attempts to provide greater clarity as to how governmental regulations and debt relief efforts may impact the Thai and South Korean markets, thereby benefitting not only the academic community but also the financial community. [FN33] The Article concludes that the “preemptive” approach in the 2004 BOT Regulation is preferable to the “bailout” approach taken by South Korea's IDRA and Thailand's PDRM for three reasons. First, the total credit card outstanding balance decreased after the BOT enacted its regulation. Second, preemption is lower in cost to implement because it does not pass the cost of resolving bad loans to taxpayers, as is the case with the bailout approach. Finally, the credit markets are more stable as a result of the preemptive approach because it signals to the market that the regulator will make narrowly focused efforts to cope with a potential credit crisis, as opposed to implementing broad bailout frameworks which can create moral hazard issues.

[FN27]. For a recent discussion of this issue as related to the home ownership policy and housing loans, see Posting of Richard Posner to The Becker-Posner Blog, Subprime Mortgage Loans-Posner's Comment (June 24, 2007), http://www.becker-posner-blog.com/archives/2007/06/subprime_mortga.html.

[FN28]. See generally Gon Pil Choi, Korea Institute of Finance, Shinyong Buhlangjah Keupjeungeuh Woningwah dehchek [Cause of Credit Defaulters and Its Countermeasures], Reports on Policy Research, (2004).

[FN29]. See generally 13 Korea Institute of Finance, Confronting Strategy for the Credit Defaulter Problem, Korean Economic and Financial Outlook, at 8 (2004).

[FN30]. See generally Soo-Geun Oh, et al., Easy Understanding of the IDRA Process, (Ewha University Press 2004).

[FN31]. See generally Olarn Chaipravat & Pongsak Hoontrakul, Thai Credit Market Failures: The 1997 Aftermath, 15 TDRI Q. Rev. 4, (Dec. 2000).

[FN32]. See generally Thaicharoen et al., supra note 14.

[FN33]. In particular, global investment banks based in the Asia-Pacific region have a significant interest in the South Korean and Thai markets. Specifically, such interest is in part focused on the Korean consumer non-performing loan (“NPL”) market. If the IDRA is effective in curing South Korea's creditor delinquency problem, the NPL pool size may be less than if the IDRA is ineffective legislation and does not significantly curb the growing number of consumer defaults in South Korea. Often such NPLs are purchased by global investment banks, such as Morgan Stanley, Goldman Sachs, Deutsche Bank, and Lehman Brothers, to use as collateral for the issuance of high-yielding asset-backed securities vis-à-vis the use of a special purpose vehicle as issuer domiciled in a tax-efficient jurisdiction, such as Bermuda, Cayman Islands, Labuan, or Mauritius.

This article is published with the kind permission of Jasper Kim and Kemavit Bhangananda. This article was first printed in Volume 17, Issue 1, 2008, of the Pacific Rim Law & Policy Journal, at the University of Washington School of Law, in Seattle, Washington, United States. For permission to reprint this article or otherwise make use of it, please contact the Pacific Rim Law & Policy Journal at pacrimeic@gmail.com.