Shrinking Private Loan Industry... 200,000 Users Lost in Six Months

[Asia Economy, reporter Kangwook Cho] The private loan industry is rapidly shrinking. The number of users has dropped by 200,000 in just six months. Analysts attribute this ongoing decline in unsecured loans, especially among large private lenders, to the reduction of the maximum legal interest rate since December 2018.

According to the "2020 First Half Private Lending Industry Survey" released by the Financial Supervisory Service on December 30, the number of private loan users at the end of the first half of this year stood at 1,575,000, down 11.4% (202,000 people) from 1,777,000 at the end of last year. The number of private loan users has been decreasing at an accelerating pace each year, from 2,473,000 at the end of 2017.

The outstanding balance of private loans was 15.0431 trillion won, a decrease of 5.5% (873.9 billion won) from 15.917 trillion won at the end of last year. In particular, the outstanding loan balance of large private lenders with assets exceeding 10 billion won saw a significant reduction. About 90% of private loan customers use large private lenders, whose outstanding loan balance at the end of last year was 12.1106 trillion won, down 1.009 trillion won from 13.1196 trillion won at the end of the previous year. The number of private lenders also decreased by 20, from 5,652 at the end of the first half to 5,632.

The Financial Supervisory Service cited two main reasons for the shrinking scale of the private loan industry: the downsizing of operations by savings bank-affiliated private lenders and the suspension of new loans by large Japan-based private lenders. The outstanding balances of Japan-based large private lenders and savings bank-affiliated private lenders have steadily declined, from 6.3 trillion won at the end of 2018 to 4.7 trillion won at the end of last year, and to 3.8 trillion won at the end of the first half of this year.

The expansion of policy-based microfinance products has also contributed. The supply of policy-based microfinance products such as Sunshine Loan and Saitdol Loan increased steadily from 6.9 trillion won at the end of 2017, to 7.2 trillion won at the end of 2018, and to 8 trillion won at the end of last year. In the first half of this year alone, 4.2 trillion won was supplied.

As of the end of the first half of this year, the average loan interest rate was 17.0%, down 0.9 percentage points from 17.9% at the end of last year, due to the reduction in the maximum legal interest rate and other factors.

Of the total outstanding loans (15.0431 trillion won), unsecured loans accounted for 7.8502 trillion won (52.2%), while secured loans made up 7.1929 trillion won (47.8%). The proportion of secured loans continues to rise, indicating a shift in the structure of private lending from a focus on short-term unsecured loans to a diversification that includes real estate-backed loans and others.

The number of P2P loan-linked private lenders decreased by two to 237 companies compared to the end of last year. The outstanding balance of P2P loans, which had been growing rapidly, turned downward to 2 trillion won, a 7.6% decrease (200 billion won) from 2.2 trillion won at the end of last year.

The Financial Supervisory Service expects P2P loans to decline significantly in the future, as the requirements for registering as an online investment-linked financial business have been strengthened under the "Online Investment-Linked Financial Business Act," which took effect on August 27.

A Financial Supervisory Service official stated, "Since the reduction of the maximum legal interest rate, the decline in unsecured loans has continued, especially among large private lenders. This is mainly due to the suspension of new loans by large Japan-based private lenders and the downsizing of operations by savings bank-affiliated private lenders." The official added, "As the proportion of secured loans continues to rise, the structure of the private lending industry is diversifying from a focus on short-term unsecured loans to an increasing share of real estate-backed loans and others."

The official further noted, "The average loan interest rate has continued to fall due to the reduction in the maximum legal interest rate and other factors, easing the interest burden on private loan users. We will closely analyze and strengthen monitoring of the impact of the lower maximum interest rate in the private lending sector on credit supply to low-credit borrowers."

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