Soaring House Prices, Surging Stock Market, Stalled Self-Employment... 'Yeongkkeul' Extends to Secondary Financial Sector (Comprehensive)

Balloon Effect of Large-Scale Regulation
Concerns Over Subprime Bomb

[Image source=Yonhap News]

[Asia Economy Reporter Ki Ha-young] "Card loans are sought by middle- to low-credit borrowers with ratings from 3 to 6, but usage among high-credit borrowers has significantly increased. This is likely due to the impact of the COVID-19 pandemic on living expenses or debt-financed investments. Recently, the tightening of bank loans has also played a role. Although delinquency rates remain low thanks to government financial support, there is a risk that delinquency rates could skyrocket in the first half of next year, potentially triggering a wave of bad loan defaults." (A Card Company Official)

As banks uniformly tighten lending due to government regulations, a 'balloon effect' is materializing, with borrowers moving to secondary financial institutions such as savings banks and card companies. Notably, high-credit borrowers are increasingly taking out loans from the relatively high-interest secondary financial sector. Although financial authorities have imposed regulations on bank credit loans to curb 'Yeongkkeul' (borrowing to the limit) and debt-financed investments, the shift to high-interest loans raises concerns about increased principal and interest repayment burdens. Especially with the anticipated economic downturn due to the third wave of COVID-19, there are predictions that financial distress bombs will surface after government support ends in the first half of next year.

According to the financial sector on the 11th, a branch of C Savings Bank in the Euljiro area has recently seen a significant increase in inquiries about high-interest overdraft accounts and other loans compared to previous years. A representative from the savings bank hinted, "Recently, we have received many calls asking whether it is possible to get the maximum limit on overdraft accounts and to increase the limits on existing credit loans." This is interpreted as demand from borrowers who lost eligibility for bank credit loans moving to savings banks and other institutions following the bank credit loan regulations.

'Card Loans' Usage by High-Credit Borrowers Increases, Savings Bank Household Loans Also Surge

Since the beginning of this year, loans from secondary financial institutions have surged due to the impact of COVID-19 and other factors. According to the Bank of Korea, the outstanding household loans at savings banks reached 29.5913 trillion KRW at the end of the third quarter. This is an increase of 1.8267 trillion KRW in just three months compared to the previous quarter. This is the largest increase since the Bank of Korea began publishing related statistics in the first quarter of 2003. Card loans have also increased significantly. According to NICE Credit Rating, the outstanding card loan balance of seven specialized card companies (Shinhan, Samsung, Kookmin, Hyundai, Lotte, Woori, Hana) reached 30.6913 trillion KRW in the third quarter of this year, a 7.1% increase compared to 28.6523 trillion KRW in the same period last year.

In particular, the demand for card loans among high-credit borrowers has noticeably increased. As of October, for example, 32.66% of Woori Card customers using card loans received interest rates below 10%, up nearly 10% from 20.62% in the previous month. Hyundai Card also reported that 31% of its total card loan customers were charged interest rates below 10% as of October. This indicates that high-credit borrowers have been actively using card loans. However, as of the third quarter, the one-month delinquency rate for card loans was 1.4%, down 0.2 percentage points from the previous year. The industry explains this as a visual illusion caused by COVID-19. There is widespread concern that a tsunami of bad debts could hit the entire financial sector when the government's loan repayment deferral measures end.

A financial sector official pointed out, "The balloon effect caused by bank loan regulations could ultimately exacerbate bad debts in the secondary financial sector," adding, "Once COVID-19 related financial support measures end, a wave of bad debt bombs could explode all at once."

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