A case in point is a bill, currently before the Legislative Yuan, which would lower the annual statutory interest-rate ceiling of 20% that banks may charge credit-card customers for revolving credit. The proposed new cap would be defined as 9% above the Central Bank’s rate for unsecured short-term lending – which at current levels would come to 12.5%.

Given the anemic economy and rising unemployment, many people are struggling to make ends meet. Since the Central Bank has substantially reduced the cost of funds to the banks, proponents of the bill would argue, shouldn’t that saving be passed along to the consumer?

The major flaw in that reasoning is that the same severe economic downturn prompting the Central Bank to cut interest rates will inevitably lead to a higher incidence of credit-card delinquency, raising the banks’ cost of credit. Further, the cost of funds is only one part of the total operating cost for the banks’ credit-card departments. Looking only at the interest rate neglects the burden of processing huge quantities of small-volume transactions and of maintaining 24-hour customer service.

What would happen if banks had to slash the maximum interest charged on rollover balances? The immediate result would be to force banks to protect themselves against heavy losses by tightening up on their credit policies. According to one industry calculation, that would cause at least 3.5 million credit cards with a total credit facility of NT$690 billion to be withdrawn from the market. The estimated annualized impact on retail sales would be NT$274 billion – just at a time when the deepening recession calls for efforts to increase private consumption, among other forms of economic stimulus.

Further, consumers and small businesses who are in the weakest financial situation– those the bill presumably aims to help – would inevitably be among the first to have their credit cut off as banks tighten credit controls. Many of them would then be forced to turn to the underground market – meaning loan sharks – whose charges, subject to no regulation at all, would make the current 20% bank ceiling look minuscule.

Finally, passing the suggested bill would severely impact Taiwan’s aspirations of eventually becoming a regional financial center. The proposed new interest rate cap would make Taiwan the least profitable market in Asia, discouraging international financial institutions from putting any more resources into their businesses here.

The proposed changes are bad for the economy, bad for the consumer, and bad for Taiwan’s future as a financial market. It is vital for the executive branch and clearer heads in the legislature to act now to ensure that the proposed bill does not become law.