Card Loan Balance Hits 32 Trillion Won, Record High... Concerns Over Financial Instability Trigger (Comprehensive)

Card Loans Reached 32 Trillion Last Year, Up 3 Trillion from Previous Year
Average 14% High-Interest Loan Products
Recovery Rate in First Half of Last Year 11%... Less Than Half of Financial Crisis
Concerns Over Defaults Expand Due to Prolonged Recession

[Asia Economy Reporter Ki Ha-young] Kim Ji-sun (55, pseudonym), who runs a small restaurant in Bundang, Gyeonggi Province, started turning to card loans to cover living expenses as business became difficult due to COVID-19. It became harder to borrow money from the bank where she had previously taken out loans as her store's sales declined. Despite having a bank loan of 30 million won and three cash advances, she ended up borrowing more to cover rent and restaurant maintenance costs, resulting in a situation where she was using loans to pay off other loans. Kim said, "Many people in business around me are juggling two to three card loans," adding, "I'm afraid I might have to borrow from private lenders eventually, but since business is bad, I have no choice."

Last year, the balance of card loans (long-term loans) exceeded 32 trillion won, marking an all-time high. As the economy stagnated due to COVID-19, self-employed individuals in urgent need of funds or those unable to borrow from banks and other primary financial institutions with raised lending thresholds turned to card loans. Given the characteristics of card loans, which involve many low-credit or multiple debtors, concerns have arisen that economic downturns and rising interest rates could accelerate loan defaults.

According to the financial industry on the 18th, the card loan balance of seven specialized credit card companies (Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, Hana Card) stood at 32.046 trillion won at the end of last year, the highest ever recorded. This is about 3 trillion won (10.1%) more than the 29.107 trillion won recorded a year earlier.

Although the card loan balance increased, delinquency rates have decreased. As of the end of last year, Hana Card's delinquency rate was 1.02%, improving by 0.44 percentage points compared to the previous year. Woori Card and Shinhan Card also saw declines of 0.3 and 0.22 percentage points, respectively. KB Kookmin Card and Samsung Card improved by 0.17 and 0.16 percentage points, respectively.

The industry attributes this to a COVID-19-related illusion effect. The postponement of principal repayments and interest payment deferrals as part of financial support measures delayed defaults. Additionally, due to credit loan regulations in primary financial institutions, high-credit borrowers who previously showed little interest in card loans have moved into secondary financial institutions, creating a paradoxical phenomenon where loan balances increase while delinquency rates improve.

Loan Defaults Could Erupt All at Once When COVID-19 Financial Support Ends

However, card loans are high-interest loan products with an average interest rate of 14%, and since more than half of users are multiple debtors, the potential risk of default is greater compared to other loan products. According to the Korea Federation of Credit Finance, as of the end of January, 24.67% of Samsung Card's card loan customers were subject to high interest rates between 20% and 24%. Hyundai Card also recorded a rate close to 10%, at 9.79%.

The proportion of multiple debtors is also high. According to data on card loan balances and delinquency status received by Democratic Party lawmaker Jeon Jae-soo from the Financial Supervisory Service, as of the first half of last year, out of 2,603,541 total card loan users, 1,460,027 (56.1%) were multiple debtors who had loans from three or more financial institutions, including the one providing the card loan. The card loan recovery rate in the first half of last year was 11.8%, lower than the 26.6% recorded at the end of 2008 during the global financial crisis.

According to NICE Credit Rating, as of the third quarter of last year, among the loan assets (card loans, cash advances, loan-type revolving credit) of the seven specialized credit card companies, 63.0% were held by multiple debtors with three or more financial institution loans. The asset proportion of multiple debtors has been increasing, from 60.3% at the end of 2018 to 61.7% at the end of 2019.

Therefore, concerns have been raised that if the economic downturn prolongs, defaults may begin with high-interest card loan users. This could trigger a chain reaction of household loan defaults starting with card loan users.

An industry official said, "Among card loan customers, there are many low-credit borrowers who find it difficult to borrow from banks and multiple debtors who urgently need funds for living expenses," adding, "We are closely monitoring delinquency rates and other indicators because suppressed defaults could erupt all at once when the financial support measures extended until September end."

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