Financial Sector That Withstood COVID-19 "Worries After March Next Year"

Activation of the Financial Consumer Protection Act
Violations of Disclosure Obligations May Result in
Up to 50% 'Punitive Surcharge'
Management Can Also Be Held Accountable
Extension of SME Loan Maturities Ends
A Wave of Defaults May Loom

[Asia Economy Reporter Jo Gang-wook] Despite holding up well amid the aftermath of the novel coronavirus infection (COVID-19), the financial sector is struggling with concerns over deteriorating profitability next year. As the effects of financial support measures such as maturity extensions and interest payment deferrals come to an end early next year, there are warnings that a "bad debt tsunami" could hit. This is compounded by the activation of the Financial Consumer Protection Act (FCPA) and the reduction of the maximum interest rate, making the management environment surrounding the financial sector challenging.

According to the financial sector on the 18th, commercial banks are currently forming a joint task force (TF) and sharing response plans ahead of the FCPA enforcement scheduled for March next year. They are also focusing on eliminating elements of incomplete sales on their own. At a recently held "FCPA Response TF Meeting," financial consumer protection officers from major banks gathered to collect opinions related to the enforcement decree of the FCPA and to identify issues that the banking sector could jointly propose for consultation and coordination with the authorities. In addition to forming the joint TF, legal counsel for reviewing the legislation is also reportedly being prepared.

The FCPA centers on a "punitive surcharge" system that imposes fines of up to 50% of the income from related products if financial companies violate obligations such as explanation duties, prohibition of unfair solicitation, and false or exaggerated advertising. It also includes a "right of withdrawal" system that allows consumers to cancel subscriptions for bank loans, insurance products, funds, and more within a certain period without any reason. Under the FCPA's subordinate regulations, responsibility can also be imposed on executives such as CEOs, deepening the concerns of financial company CEOs who must take direct responsibility for consumer protection.

Furthermore, from the second half of next year, the statutory maximum interest rate will be lowered by 4 percentage points from the current 24% per annum to 20%, which is expected to inevitably impact secondary financial institutions such as card companies, capital companies, savings banks, and loan businesses. The particular issue is that the maximum interest rate reduction must be applied retroactively to customers who have already taken out loans at 24%, meaning interest rates must be lowered from the point the reduction starts. For savings banks, which mainly focus on unsecured loans, a decline in profitability has become unavoidable.

Some argue that the maximum interest rate reduction is far from the financial authorities' expectations of easing interest burdens on low-income earners and activating mid-interest loans. When the maximum interest rate is lowered, loans previously extended to low-credit borrowers become practically difficult to execute due to risk reduction. Although the government has pledged to strengthen policy-based financial services for low-income earners to minimize side effects, the private sector raises concerns that as many as 600,000 people?about 15 times the government's estimate?could be driven to illegal private loans.

There are also warnings that when the loan maturity extension and interest payment deferral measures end in March next year, a repayment bomb exceeding 100 trillion won in principal and interest could explode all at once, triggering a bad debt tsunami. The Korea Institute of Finance recently forecasted that domestic banks' net income for 2021 will decrease by 0.1 to 2.1% to between 9.3 trillion and 11.3 trillion won compared to this year (11.4 trillion won). In particular, due to the prolonged COVID-19 pandemic, some companies' credit ratings have been downgraded and bad debts have materialized, with expected loan loss costs reaching between 8 trillion and 11.2 trillion won. The representative profitability indicator, return on assets (ROA), is also expected to fall significantly to between 0.30% and 0.36% from this year's 0.39%.

Seo Byung-ho, head of the Banking and Insurance Research Division 2 at the Korea Institute of Finance, said, "When companies announce their performance next year, credit ratings may change, which could increase loan loss costs. Since larger-scale loan loss costs may occur next year, conservative management of loan assets, active management of credit portfolios, and sufficient provisioning for loan loss reserves and allowances are required."

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