Rapid Increase in Secondary Financial Sector Loans Due to Debt Investment and COVID-19... Financial Risk 'Red Alert'

Savings Banks and Mutual Finance Loan Balances
376.8422 Trillion KRW in October Last Year
Increased by Over 30 Trillion KRW Compared to the Previous Year

[Asia Economy reporters Park Sun-mi and Kim Hyo-jin] As commercial banks strengthen risk management and tighten loans, lending is shifting to the secondary financial sector where interest rates are higher. With mixed demand for funds for stock and real estate investments and loans from small business owners struggling due to the spread of the novel coronavirus infection (COVID-19), there are growing concerns that the soundness of the secondary financial sector, heavily used by vulnerable borrowers such as middle- and low-credit borrowers and low-income individuals, is being threatened.

According to the Bank of Korea on the 11th, as of the end of October last year, the loan balances of savings banks and mutual finance institutions amounted to 74.3955 trillion won and 302.4467 trillion won respectively, totaling 376.8422 trillion won. This is an increase of more than 30 trillion won compared to 347.4136 trillion won at the end of 2019. In particular, savings banks saw a loan growth rate of 17.1% compared to the same period the previous year.

While household credit loan interest rates at commercial banks are at the 3% level, interest rates in the secondary financial sector are in the mid-to-high teens of 10%, resulting in a heavy interest burden. Moreover, many customers using the secondary financial sector are vulnerable borrowers such as middle- and low-credit borrowers and low-income individuals who cannot borrow from primary financial institutions, which is a factor that inevitably raises concerns about the increase in loans in the secondary financial sector. There is a risk that loan defaults may arise, especially among vulnerable borrowers with lower repayment ability.

The secondary financial sector needs to start 'sorting out' borrowers, but it is not easy. Unlike corporations whose management status can be analyzed, it is relatively difficult to judge early signs of default for small business owners, limiting the financial sector's response.

Above all, the increase in corporate loans in the secondary financial sector presents a greater concern in the post-COVID era, where corporate insolvency is inevitable.

As of the end of August last year, corporate loans in the secondary financial sector amounted to 178.4 trillion won, a 16.8% increase compared to 152.7 trillion won at the end of 2019. As of the end of August, the corporate loan growth rates compared to the end of 2019 were 10.7%, 9.5%, and 19.4% for banks, savings banks, and mutual finance institutions respectively. The growth rate of mutual finance institutions, where personal business loans account for 57.9%, is particularly notable.

Concerns Over Soundness of Small- and Medium-sized Secondary Financial Institutions
"Proactive Response Needed Through Expansion of Loan Loss Provisions, Especially Among Small Financial Companies"

Although savings banks still appear generally sound, risk signals have been detected in some regional savings banks. As of the end of the second quarter, the average delinquency rate for savings banks was 3.32% in the metropolitan area and 5.54% in regional areas, with some regions exceeding 10%.

Goo Jeong-han, a research fellow at the Korea Institute of Finance, advised, "Even if the soundness of the banking and secondary financial sectors is currently stable, considering the rapid increase in loans to small and medium-sized enterprises including personal business loans, proactive measures such as expanding loan loss provisions centered on small financial companies in the secondary financial sector, which are relatively vulnerable to risks, are necessary."

Baek Jong-ho, a research fellow at Hana Financial Management Research Institute, also warned, "Signs of deterioration in financial soundness are emerging in the secondary financial sector. Although financial support for borrowers temporarily facing difficulties due to COVID-19 is inevitable, the broad-based support makes it difficult for the financial sector to take preemptive measures. Therefore, if the impact of COVID-19 is reflected mainly in the secondary financial sector, which has a high proportion of vulnerable industries and low-credit borrowers, profitability decline and soundness deterioration are expected to accelerate."

Financial authorities are closely monitoring the increase in loans in the secondary financial sector with vigilance. Due to concerns that funding difficulties for small and medium-sized enterprises and self-employed individuals could lead to financial sector insolvency, the authorities are planning a smooth landing roadmap to normalize financial support. They intend to prepare additional provisioning standards to enhance preemptive loss absorption capacity in anticipation of prolonged economic downturn caused by COVID-19 and to closely monitor soundness trends.

A financial authority official explained, "However, in the case of the secondary financial sector, many loans are related to living expenses of ordinary people due to COVID-19 rather than 'debt-financed investment' or 'all-in investment.' While we will manage soundness through overall strengthening of loan screening, there are difficulties in preparing preemptive financial risk responses due to the COVID-19 situation."

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