[Desk Column] Loan Cliff and Balloon Effect

Additional Regulations on Loans from Commercial Banks Starting on the 14th Following High-Income Borrower Loan Restrictions on the 30th
KB Kookmin Suspends Loans Over 100 Million Won... Shinhan Bank Also Halts Some Non-Face-to-Face Credit Loans
Borrowers Face Greater Difficulty Getting Loans from Banks, Raising Concerns of Balloon Effect Toward High-Interest Secondary Financial Institutions

[Image source=Yonhap News]

[Asia Economy Reporter Lee Cho-hee] These days, I receive a lot of text messages and phone calls urging me to take out loans. Could it be that my personal information has been leaked? The types of loans vary from unsecured loans to newlywed loans. They all consistently entice people to borrow money with the lure of low interest rates.

One interesting thing is that you can somewhat sense market trends through these spam calls. Nowadays, most calls offer startup funds, small business support funds, or low-income credit loans. I think these loan advertisements are targeting year-end voluntary retirees or local merchants whose livelihoods have become tight.

Thinking about it, loan advertisement calls sharply increased around August to September, when the prolonged phase of the novel coronavirus infection (COVID-19) set in. An increase in advertisements for specific products in the commercial market usually correlates with rising demand. The rise in loan spam seems closely related to the surge in low-income loan demand caused by COVID-19.

Times of crisis such as global depressions or pandemics have always existed throughout history. From China's Spring and Autumn and Warring States periods to the European Dark Ages when Romans clashed with Celts, Germans, and Vikings, and even after civilization progressed, several major depressions have led to disastrous outcomes.

When a crisis era arrives, the first to fall into ruin are always the common people. The fact that most loan solicitation calls are for low-income loan products reflects this reality. Recently, even low-interest loan voice phishing scams promising to help people refinance at lower rates have been rampant. This signals that the risks faced by the low-income class have increased significantly due to COVID-19.

Meanwhile, the financial authorities' pressure on banks to regulate loans has become a hot topic. Since the targeted loan restrictions on high-income earners began on the 30th of last month, the financial authorities recently summoned executives of commercial banks and issued another warning. The pressure was to "strictly adhere to the household loan total volume management target within the year" because household loan management had not been properly handled.

Under the authorities' severe crackdown, banks have entered unprecedented loan regulation. KB Kookmin Bank immediately stopped unsecured loans exceeding 100 million won starting this week. It is not unusual for the government to step in and manage private loans when they surge, as this has been repeatedly done in the past. The problem lies in the timing. Let’s turn back the clock 10 years. After the 2008 Lehman Brothers crisis, household loans, which had been decreasing, began to rise, prompting authorities to tighten loan regulations. In the fourth quarter of 2009, household loans exceeded 16 trillion won. In particular, non-bank loans surged. When bank loans were restricted, demand shifted to other financial sectors despite higher interest rates.

Now, more than 10 years later, a similar pattern is about to repeat. The increase in household debt in the secondary financial sector has recently hit its highest level in four years. A balloon effect similar to what is shaking the real estate market is about to reappear in the financial loan market.

The balloon effect refers to the phenomenon where pressing one side of a balloon causes the other side to bulge out. In other words, trying to fix a problem in one area causes issues to arise elsewhere. The economy is like a large balloon; pressing one side inevitably causes another side to pop out. Many policies throughout history have failed due to the balloon effect, and the damage has always been borne by the people.

The Moon Jae-in administration has already caused balloon effects several times by prematurely intervening in the market. The reduction of credit card merchant fees ultimately led to reduced benefits for customers. Real estate policies have been playing hide-and-seek with the government, as suppressing one area causes unexpected bubbles elsewhere. In 2018, tightening mortgage loan regulations led to a shift toward unsecured loans. Every time strong regulations are introduced, stronger balloon effects appear in the market, resulting only in wasted efforts.

When problems arise in the market, the government can intervene. However, if authorities try to directly control prices and demand in specific private markets, side effects are inevitable. When household loan indicators increase, it is time to consider for whom policies that choke off the lifeline of low-income people who truly need money are really intended.

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