Will Secondary Financial Sector Loans Also Be Tightened?... 4 Trillion Won Soars in Two Months

Secondary Financial Sector Credit Loans Surge
High-Interest Card Loans Also Attract Attention
Financial Supervisory Service Requests Loan Data

[Asia Economy Reporters Oh Hyung-gil and Kim Min-young] "Despite the novel coronavirus infection (COVID-19), bank interest rates have been very low, and due to the impact of COVID-19 support policy loans, loans did not expand as much as expected. However, from the second half of the year, loans centered on unsecured credit increased, and this month, loan inquiries have noticeably surged." (An executive in charge of loans at A Savings Bank)

Unsecured loans in the secondary financial sector, such as insurance and savings banks, are rapidly increasing. This is interpreted as a balloon effect caused by tightening loans in commercial banks, which had surged due to debt-financed investment (debt investment) and pulling together all resources (Yeongkkeul).

The market views that, given the high interest rates characteristic of the secondary financial sector and that loans are mainly taken by low-income and low-credit borrowers, it is unlikely that these funds flowed into stock or real estate investments. However, financial authorities are preparing to manage loans in the secondary financial sector, keeping the possibility of a balloon effect in mind.

According to the Financial Supervisory Service and the financial industry on the 23rd, household loans in the secondary financial sector increased by about 4 trillion won in the second half of the year alone. After increasing by 1.8 trillion won in July, an additional 2.2 trillion won was added last month. By sector, household loans increased by 1.3 trillion won each in savings banks and capital/card companies (credit finance companies), and insurance also saw an increase of 1.1 trillion won.

Unsecured loans increased significantly more than mortgage loans. Of the 3.5 trillion won increase in other loans in July and August, unsecured loans accounted for 1.7 trillion won, or half, while mortgage loans increased by only 200 billion won.

Yoon Seok-heon, Governor of the Financial Supervisory Service, is attending the 'Real Estate Market Inspection Meeting of Related Ministers' held at the Government Seoul Office in Jongno-gu, Seoul on the 23rd. Photo by Kang Jin-hyung aymsdream@

Financial Authorities Begin Checking Balloon Effect of Loans in Secondary Financial Sector

Household loans in the secondary financial sector had been on a declining trend until May. Due to the COVID-19 pandemic and low interest rates, the scale of household loans decreased by 5 trillion won from the end of last year between January and May. However, from June (500 billion won), the loan scale turned to an increase.

Demand also surged for card loans, which have an average high interest rate of around 15%. Card loans, which have relatively lenient loan screening and long repayment periods and are mainly used by small business owners, also turned to an increasing trend from the second half of the year. As of July, the outstanding balance of card loans at seven domestic specialized card companies was 30.0802 trillion won, an increase of 291 billion won from the previous month (29.7892 trillion won). Usage also increased by 74.6 billion won, from 3.9145 trillion won to 3.9891 trillion won.

Typically, the secondary financial sector has more low-income and low-credit borrowers than banks, and the proportion of real demand rather than investment is high, so demand is concentrated on living expenses or business funds. However, there is analysis that as financial authorities tightened bank loans to curb debt investment and Yeongkkeul, loan demand in the secondary financial sector increased.

Accordingly, financial authorities plan to examine whether there is a balloon effect in loans in the secondary financial sector. The Financial Supervisory Service recently requested credit loan-related data from the Korea Federation of Savings Banks and is working to grasp the loan status in the secondary financial sector.

Since they requested banks to submit household loan management plans by the 25th, along with managing loans for high-income and high-credit borrowers, it is expected that a comprehensive management guideline will be issued after the Chuseok holiday based on the inspection results.

A savings bank official said, "If loans are blocked at banks for high-credit or professional borrowers, they may next seek mutual finance companies with relatively lower interest rates," but added, "However, since savings bank unsecured loan interest rates start at a minimum of around 5% per annum, the demand to replace banks is not expected to be high."

[Image source=Yonhap News]

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