In-Bank, 30% of Personal Loans to Mid-Low Credit Borrowers... Emerging as a New Battleground in the Mid-Interest Rate Market (Comprehensive)

In-Bank Loans for Medium and Low Credit Borrowers Account for 12.1% of Total... Half of Commercial Banks
Failure to Implement Mid-Interest Rate Expansion Plan May Disrupt New Business
In-Bank Faces Inevitable Clash with Savings Banks Over Customers with 6.5~16% Rates

[Asia Economy reporters Kiho Sung and Seungseop Song] Internet-only banks such as KakaoBank and K Bank are required to supply 30% of their total credit loans to middle- and low-credit borrowers with credit ratings of grade 4 or lower by the end of 2023. Failure to meet this target will result in disadvantages when entering new business areas. The internet-only banks plan to additionally supply 2.6 trillion KRW in credit loans this year, raising the total to about 4.6 trillion KRW.

On the 27th, the Financial Services Commission announced the "Internet-only Banks Middle- and Low-credit Borrowers Loan Expansion Plan," which includes these details. The goal is to ensure that internet-only banks provide loans to middle- and low-credit borrowers in accordance with the original law and purpose of their introduction.

KakaoBank 30%, K Bank 32%... Internet Banks Significantly Increase Mid-interest Loans

Internet-only banks were introduced in 2016 to promote competition and innovation in the financial industry through the convergence of information technology and finance, and to enhance consumer benefits. K Bank and KakaoBank began operations the following year.

Over the past four years, they have supplied a total of 2.5 trillion KRW in mid-interest loans, but 66% of the Saetdol Loan, a guaranteed policy product, was supplied to high-credit borrowers (grades 1 to 3). Additionally, credit loans have focused on high-credit borrowers, resulting in the proportion of credit loans to middle- and low-credit borrowers accounting for only 12.1% of total credit loans by internet-only banks as of the end of last year, which is much lower than the average of commercial banks (24.2%).

Accordingly, financial authorities plan to gradually expand the proportion of credit loans to middle- and low-credit borrowers by KakaoBank, K Bank, and Toss Bank, which is currently undergoing final approval, to achieve at least 30% by the end of 2023. The outstanding balance of credit loans to middle- and low-credit borrowers, which was about 2 trillion KRW at the end of last year, will be expanded by 2.6 trillion KRW to 4.6 trillion KRW by the end of this year.

KakaoBank plans to increase the proportion of middle- and low-credit borrowers from about 10.2% at the end of last year to 30% by the end of 2023, while K Bank aims to raise it from 21.4% to 32% during the same period. Toss Bank plans to set this proportion above 30% from its first year of operation and expand it to over 40%.

In particular, supervision and management will be strengthened to ensure that internet-only banks properly implement their plans to expand loans to middle- and low-credit borrowers. The implementation status of each bank will be publicly compared, and the government will regularly inspect this. If the plan is not implemented, this will be taken into account when granting permits for new businesses. When internet-only banks and their major shareholders apply for permits to enter other financial businesses, the implementation status will be considered as a qualitative judgment factor.

However, the financial authorities did not set a separate interest rate cap for loans to middle- and low-credit borrowers by internet-only banks in this plan. This has raised concerns that it might be used as a channel for excessive profit-seeking by internet-only banks. A financial authority official explained, "If interest rates are properly evaluated and calculated, it is desirable for the market to operate in a way that can expect an appropriate level of profit." Additionally, when managing household debt growth rate targets for banks, partial exceptions for the supply amount to middle- and low-credit borrowers will be considered.

Savings Banks and Internet Banks Clash in Mid-interest Market with Rates from 6.5% to 16%

Meanwhile, due to government guidelines, fierce competition between internet banks and savings banks in the mid-interest loan market is inevitable. Savings banks also expect that some mid-interest loan customers may shift to internet banks, as internet banks have advantages in recognition and convenience.

A savings bank official said, "In the financial industry, which is a competition of scale, it is difficult to beat platform companies," and analyzed, "Customer competition will become more intense, and relatively high-credit borrowers among mid-interest users will leave."

There is also an analysis that the mid-interest loan market is merely being segmented and divided, and savings banks still have strengths in serving middle- and low-credit borrowers. Another savings bank official claimed, "No matter how much internet banks expand mid-interest loans, it is difficult for them to reach middle- and low-credit borrowers," and added, "Unlike internet banks that focused on high-credit borrowers, savings banks have more information and management know-how for low-credit borrowers."

Internet banks acknowledge the expertise savings banks have in mid-interest loans. An internet bank official evaluated, "Savings banks have a vast amount of mid-interest loan volume and data," and "Especially, they have accumulated direct customer data related to mid-interest loans, which is a strength."

Internet banks plan to counterattack savings banks by advancing their Credit Scoring Systems (CSS). They believe that the core of the mid-interest loan market lies in the ability to assess repayment capacity. KakaoBank will develop and apply a new CSS with a specialized model added in June this year. K Bank plans to add a specialized model for those with insufficient financial history to its CSS in the fourth quarter and use pseudonymized combined data of financial and alternative information for credit evaluation. Toss Bank will also build a CSS reflecting customer information for specialized financial products for middle- and low-credit borrowers.

Experts say that as the mid-interest market grows and competition intensifies, consumers will also benefit in terms of choice. Professor Seongin Jeon of the Department of Economics at Hongik University explained, "Some may ask why banks should increase mid-interest loans since they are not charities, but internet banks promised this when they entered the market," adding, "This measure will significantly help middle-credit borrowers whose credit scores have somewhat declined due to COVID-19."

Professor Taegie Kim of the Department of Economics at Dankook University also mentioned, "In Korea, after commercial banks, the only option was high-interest loans from secondary financial institutions, so mid-interest loans were a weak link," and said, "As accessibility improves and more products and companies tailored to mid-interest loans increase, it will become easier to get loans at reasonable interest rates."

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