Upcoming Household Debt Management Plan Announcement... "Time to Move Away from Bank-Centric Lending Practices"

This Year’s Bank Loan Growth Rate Expected to Be 6%, Half of Last Year’s Level

[Asia Economy Reporter Sunmi Park] Although the scale of household loans in the banking sector exceeded 1,000 trillion won as of the end of February, there are growing concerns that if the financial authorities establish household debt management measures within this month, banks will face limitations in generating profits through loan growth as they did in the past.

On the 11th, the Korea Institute of Finance forecasted that the loan growth rate in the banking sector this year will record 6%, which is half the level of last year. This analysis points to significant factors reducing loan supply, such as the reduction of unsecured loans on the household loan side and the commencement of risk management due to the expansion of COVID-19 related loans on the corporate loan side.

Last year, domestic bank loans increased at a rate exceeding 10% despite the economic recession caused by COVID-19. This far surpasses the 6.2% loan growth rate in 2019 and is the highest since the 14.4% recorded during the financial crisis in 2008.

Considering that rapid loan growth in the past was followed by a deterioration in asset soundness and that the repayment ability of corporations and individual business owners has continuously worsened since 2016, the sharp increase in loans last year inevitably has a negative impact on the medium- to short-term asset soundness of domestic banks.

Also, although there is a possibility that the net interest margin (NIM), an indicator of bank profitability, which fell to a record low of 1.38% in the fourth quarter of last year, may rebound from the first quarter of this year due to rising market interest rates, considering the sharply declining market interest rates since 2019, the conversion of relatively high-interest loans executed before 2019 into low-interest loans and the increase in funding costs due to banks’ strengthened incentives to secure liquidity are expected to constrain NIM expansion.

Banks are thus faced with the task of preparing for the potential deterioration of asset soundness of the rapidly expanded loans last year and continuously improving the quality of their loan portfolios in the future. This is also the background behind the growing calls for banks, which relied on loan growth last year, to devise new strategies in preparation for a future decline in loans.

Research fellows Bonseong Koo and Woojin Kim of the Korea Institute of Finance recently advised in their report "Outlook and Challenges of the Banking Industry" that "In the case of household finance, which most banks are focusing on, there is a need to shift from loan-centered operations to services linking loans and asset management, and to strengthen family services beyond individual customers." They added, "Since regulations related to mortgage loans and unsecured loans have recently been tightened, making it difficult to increase loan assets, fostering real-time loan services related to consumption, such as installment finance and purchase finance, could be one alternative."

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