Credit card defaults cause two thirds of 'skips'

While personal loans were the dominant debt type behind expatriate borrowers leaving without settling bills between 2000 and 2003, skipping because of credit card default recorded a sharp rise from 30 per cent in 2004 to 66 per cent by Q3 2009, shows a report to be released today.

Bank records analysed by Orion Analytics for the first-of-its-kind Skip Report, which gauges skipping between 2000 and Q3 2009, reveal that the defaults are linked with the increased issuance of credit cards, which started around 2003.

"The sudden shift cannot be attributed to tightened bank lending policy, since the commercial banking sector did not reorient lenient lending policies till well into the recession, when both credit card and loan defaults rose in an unprecedented manner," says the report, shared exclusively with Emirates Business.

"Increased credit card activity, in fact, epitomised the boom years of the economic upswing. Banks set few conditions for extending the service and in most, a salary account was enough to issue credit cards. The pattern shows that card issuance increased around 2003, and defaults started registering an increase the following year onwards.

"In hindsight, it is apparent that commercial banks' risk management worked on the assumption of guaranteed returns. Further-more, once the risk matrix failed, there was a visible failure on parts of banks to adjust lending policies in light of emerging market conditions," it adds.

The report further argues that banks did not foresee the local visa rules while issuing ad hoc credit cards.

"Surprisingly, nobody seems to have taken into account government policy of visa cancellation in one to three months after job loss. Therefore, increasing unemployment after the international crash brought increased skipping, since leveraged borrowers facing job termination had only one really viable option – skipping," the Orion Analytics report contends.

The report highlights that in keeping with the demographics of the region, Indians, Pakistanis and Filipinos are the leading nationalities in terms of skipping, with Indian nationals being the largest represented segment (26 per cent in Q3 2009), followed by Pakistanis and Filipinos (21 per cent each).

Follow Emirates 24|7 on Google News.