[Financial Sector Warning] Rising Concerns Over Medium and Low Credit Loans Everywhere

[Asia Economy Reporter Kim Hyo-jin] Concerns over the loan soundness of middle- and low-credit borrowers, who have difficulty accessing banks or government support systems, are increasing. Amid rising urgent cash demands from ordinary citizens and small business owners due to the impact of the novel coronavirus infection (COVID-19), warning signs are being detected in various places.

According to financial authorities and the financial sector as of the day before, the delinquency rate of 144 peer-to-peer (P2P) lending companies stands at 16.2%. The P2P loan delinquency rate rose from 11.4% at the end of last year to 14.9% at the end of February this year. Although the financial authorities issued a consumer alert in March when the rate exceeded 15%, the upward trend continues.

P2P is a financial service where individuals lend money to each other through an online platform and receive interest in return. It has been noted as an alternative with a 'financial inclusion' nature, as middle- and low-credit borrowers who find it difficult to enter the traditional financial system can secure funds at lower interest rates than loan sharks. The general view is that if the funding crunch caused by COVID-19 continues, the trend of P2P delinquencies will deepen, especially among financially vulnerable groups.

Similarly, loans from the secondary financial sector, which middle- and low-credit borrowers heavily rely on, are also rapidly increasing. According to the Bank of Korea's economic statistics system, as of the end of February, loans from secondary financial institutions (non-bank financial institutions) such as savings banks, credit unions, mutual finance, and Saemaeul Geumgo totaled 548.8457 trillion won, an increase of 3.4606 trillion won (0.63%) compared to the end of January. The loan balance at the end of January rose by 1.5727 trillion won (0.28%) compared to the end of December last year, totaling 545.0251 trillion won. The increase in February is more than double that of January.

In the case of mutual finance, the delinquency rate at the end of last year was already 1.71%, up 0.39 percentage points from 1.32% at the end of the previous year. Savings banks managed somewhat with a delinquency rate of 3.7%, down 0.06 percentage points from 4.3% at the end of the previous year, but some companies have shown abnormal signs, with delinquency rates rising more than 10% compared to the beginning of the year.

Loans from specialized credit finance companies (yeojeonsa), such as capital companies and credit card companies, which are representative urgent cash channels for middle- and low-credit ordinary citizens and small and medium enterprises, are also steadily increasing. As of the end of last year, the loan scale of 107 capital, lease, and new technology finance companies excluding credit card companies was 76.7 trillion won, an 11.3% (7.8 trillion won) increase compared to 68.9 trillion won at the end of the previous year.

Last year, the loan usage (cash services and card loans) of specialized credit card companies and credit cards issued by banks with dual operations amounted to 105.2 trillion won, a 1.3% (1.4 trillion won) increase compared to 103.8 trillion won the previous year. In March, the card loan handling amount of seven specialized credit card companies was 4.3242 trillion won, up 25.6% (882.5 billion won) from 3.4417 trillion won in the same month last year. The average card loan interest rate is around 15%, which is five times that of bank loans.

Although soundness management was generally good until last year, there are concerns that it will be difficult to withstand the impact of COVID-19. A financial sector official said, "There could be a chain reaction of insolvencies among banks, secondary financial institutions, and P2P," adding, "The problem may worsen after the second quarter when the impact of COVID-19 is fully reflected."

This content was produced with the assistance of AI translation services.