They Promised Livelihood Security but Imposed Total Savings Bank Regulations... Vulnerable Groups Pushed into Blind Spots (Comprehensive)

Household Loans Excluding Mid-Interest Rates Managed Within 5.4%
Industry: "We Have No Choice but to Selectively Lend to Low-Credit Borrowers"
July's Maximum Interest Rate Reduction Approaching... Will Illegal Private Loans Increase?

[Asia Economy Reporters Kim Hyo-jin and Song Seung-seop] Financial authorities have decided to apply the ‘21% household loan growth rate rule’ to savings banks. This measure, aimed at strictly regulating the total loan volume, raises concerns that many borrowers rated grade 6 or below may be driven to illegal private loans, further expanding the blind spots. Critics argue that this approach, which focuses on superficial numerical control, contradicts the government and ruling party’s policy of managing loans without stifling the livelihood-related financial activities of low-credit borrowers.

According to financial authorities and the savings bank industry on the 2nd, the Financial Supervisory Service recently delivered the ‘2021 Household Loan Management Plan for Savings Banks’ to individual companies through the Korea Federation of Savings Banks.

Strict Total Volume Control Leads Industry to Say "We Have No Choice but to Reduce Loans to Low-Credit Borrowers"

The plan includes guidelines to operate so that the total household loan growth rate this year does not exceed 21.1%. This means keeping it at the industry’s household loan growth rate of 21.1% (KRW 5.5 trillion) from last year. The growth rate of household loans, excluding mid-interest loans and policy financial products (such as Sunshine Loans and Saetdol Loans), must be managed within 5.4%. Private mid-interest loans are defined as unsecured credit loans with an annual interest rate of 16% or less for borrowers in the lower 50% credit score bracket.

According to the guidelines, savings banks must prepare and submit future loan management plans by referring to past loan performance, business plans, and government policies. Starting at the end of this month, they must present quarterly plans on how to manage the total household loan balance and balances by product, and separately report sales strategies or products to achieve the targets. They must also include plans on how to respond if loan targets are exceeded.

The industry voices that stricter total volume control will likely shrink loan issuance. A savings bank official hinted, "We will have to reduce loans to 1-2 low-credit borrowers from the previous 10," adding, "Considering the risks, we have no choice but to selectively lend to ‘good low-credit borrowers’ who narrowly fall outside the mid-interest target." Another savings bank official predicted, "If the total volume control guidelines coincide with the reduction of the maximum interest rate, many companies may be unable to conduct loan operations in the second half of the year."

Some predict that borrowers currently paying interest rates between 16% and 24% may find it nearly impossible to obtain loans from savings banks. Concerns are rising that if the legal maximum interest rate is lowered to 20% next month and access to savings bank loans is blocked, more people will be driven to illegal private loans.

According to the Financial Services Commission, as of March last year, about 2,392,000 borrowers had loans with interest rates exceeding 20%. Of these, approximately 2,076,000 borrowers are expected to be converted or absorbed into loans with interest rates below 20% following the maximum interest rate reduction. About 316,000 borrowers will immediately face a ‘financial cliff.’

The Korea Institute of Financial Vulnerable Estimates that 80,000 to 120,000 financially vulnerable people moved to the illegal private loan market last year. The amount moved to illegal private loans is estimated between KRW 1.04 trillion and KRW 2.1 trillion. Among those who turned to illegal private loans, 69.9% were paying interest rates higher than the legal maximum.

About 30% were burdened with interest exceeding the principal within one year, and an estimated 12.3% faced ultra-high interest rates of 240% or more annually. A financial sector official pointed out, "Savings bank loans serve as a safety net to prevent financially vulnerable groups from flowing into illegal private loans, so uniformly tightening loans is no different from creating holes in that safety net."

Government, Ruling Party, and Blue House Promised to Maintain Loans for Ordinary People and Prevent Illegal Private Loans... Total Volume Regulation Goes in the Opposite Direction

Kim Tae-nyeon, the floor leader of the Democratic Party of Korea, speaking at the ruling party and government consultation on lowering the legal maximum interest rate in November last year.
[Image source=Yonhap News]

There are also criticisms that this measure contradicts the government and ruling party’s policy of not excessively restricting livelihood-related loans for low-credit borrowers. In November last year, Kim Tae-nyeon, then floor leader of the Democratic Party of Korea, said at a party-government meeting, "If financial companies reduce loans, the funding opportunities for low-credit borrowers may shrink, and illegal private loans may expand," adding, "We will devise measures to reduce the interest burden on ordinary people without reducing the supply of credit loans."

Financial Services Commission Chairman Eun Sung-soo also stated, "We will comprehensively review the level, method, timing, and supplementary measures of the interest rate reduction to maximize its benefits and minimize its drawbacks." President Moon Jae-in urged at a Cabinet meeting in March, "Please strive to improve the financial structure more equitably so that low-credit borrowers are not driven to illegal private loans."

Financial authorities say they are considering a plan to secure loan channels for low-credit borrowers by applying guidelines for mid-interest loans somewhat flexibly without being bound by strict numbers. A financial authority official explained, "It is true that household loans at savings banks increased significantly last year and need to be managed, but since there is high demand for mid-interest loans, we can adjust flexibly according to demand rather than implementing uniform measures."

About 75% of mid-interest loans across the entire financial sector last year were executed by savings banks. A financial sector official said, "The stance of the ruling party and President Moon is that even when managing household loans, the target and nature should be distinguished and approached precisely," adding, "Financial authorities need to move more swiftly to prepare detailed measures that align with this stance."

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