[Exclusive] Savings Banks Receive Sales Incentives for High Volume of Mid-Interest Loans

Mandatory Loan Ratio of 150% Applied to Mid-Interest Rate Loans
Active Supply Savings Banks Benefit from Eased Business Area Regulations

[Asia Economy Reporters Hyojin Kim and Minyoung Kim] A plan is being promoted to provide incentives related to the mandatory loan ratio regulation within the business area to savings banks that actively offer mid-interest rate loans. The purpose is to allow these banks to conduct more loan business in areas outside their legal business zones if they actively engage in mid-interest rate lending.

According to financial authorities and the savings bank industry on the 13th, the Financial Services Commission plans to finalize and implement the "Improvement Plan for Incentive System to Expand Mid-Interest Rate Loans by Savings Banks" soon. A financial authority official explained, "The improvement plan is expected to be finalized as early as next month, and no later than this year."

Savings banks are subject to a mandatory loan ratio regulation under the Enforcement Decree of the Mutual Savings Banks Act, which requires a certain percentage of total loans to be made within the region where the head office is located. The mandatory loan ratio is 50% for Seoul and Incheon/Gyeonggi, and 40% for other provinces. The financial authorities' policy is to apply a 150% weighting factor to mid-interest rate loans when calculating this ratio.

For example, if Savings Bank A, headquartered in Seoul, issues a mid-interest rate loan of 1 million KRW within Seoul, it will be counted as 1.5 million KRW in loans. This allows Savings Bank A to more easily meet the mandatory loan ratio and also secure more opportunities to conduct loan business in areas outside its business zone.

Mid-interest rate loans refer to non-guaranteed credit loan products with a weighted average interest rate of 16.5% or less per annum, a maximum interest rate below 20%, and supplied at least 70% to borrowers with credit ratings of 4 or lower. These products are created and sold by individual savings banks, and there is also the government-linked loan product "Saitdol2 Loan" in cooperation with SGI Seoul Guarantee Insurance.

The Saitdol2 Loan is a government-guaranteed loan that allows borrowers who meet income and employment period requirements (for salaried workers, employed for 5 months or more with an annual income of 12 million KRW or more) to borrow up to 20 million KRW at interest rates ranging from 8.9% to 19.9%. It is mainly used by borrowers who were rejected in bank Saitdol loan screenings.

Activating Mid-Interest Rate Loans with Regulatory Relaxation 'Carrot'

According to the Korea Federation of Savings Banks, currently 26 companies handle 61 mid-interest rate loan products. There has been a consistent demand inside and outside the financial sector to further activate such mid-interest rate loans to alleviate financial difficulties for mid-credit borrowers. The financial authorities' policy is a kind of inducement that offers a "carrot" to savings banks to partially meet these demands.

The savings bank industry, eager for regulatory relaxation on business area restrictions, welcomes this policy. An industry official said, "Since it simultaneously expands mid-interest rate loan supply and relaxes regulations, it will have a twofold effect," adding, "Once the system is implemented, many savings banks are expected to actively engage in mid-interest rate lending."

It is anticipated that the financial authorities' policy will have a significant impact especially on non-metropolitan savings banks. A representative from a savings bank located in a provincial area lamented, "Savings banks in the metropolitan area can meet the mandatory loan ratio without problems because there are many companies and high-net-worth individuals, but in the provinces, it is difficult to meet the mandatory ratio due to fewer companies and high-net-worth individuals."

The representative further predicted, "If the incentive system is introduced, mid-interest rate lending by small and medium-sized savings banks in the provinces will be relatively more activated."

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