Debt of 33 Trillion Won from Secondary Financial Institutions Since COVID-19

21.7 Trillion KRW Increase in the First Half of This Year... Twice Last Year's Net Increase
Analysis of the Balloon Effect of Loan Regulations Amid COVID-19 Financial Hardships

[Asia Economy Reporter Kim Jin-ho] It has been revealed that new loans issued by the secondary financial sector since COVID-19 have reached 33 trillion won. In particular, the amount surged to twice the total net increase of last year in just the first half of this year. This is attributed to a sharp rise in low-credit and low-income individuals pushed into financial hardship due to the prolonged COVID-19 pandemic, as well as a balloon effect caused by tightened bank loan regulations.

According to the Financial Supervisory Service and financial authorities on the 16th, the net increase in household loans from the secondary financial sector?including insurance, credit cards, and savings banks?reached 33 trillion won over the 18 months from January last year to the end of June this year.

Household loans in the secondary financial sector, which had decreased by 4.5 trillion won in 2019, continued to decline by 4.2 trillion won in the first half of last year. However, as COVID-19 became widespread in the second half of last year, loans surged by 15.5 trillion won. In the first half of this year, loans exploded by 21.7 trillion won, twice the total net increase of the previous year.

The prolonged COVID-19 pandemic is analyzed as the biggest factor behind the rapid increase in secondary financial sector loans. According to the credit rating agency NICE Information Service, the number of "multiple debtors"?self-employed individuals borrowing from three or more financial institutions?reached 1.26 million at the end of last year, increasing by more than 200,000 (19.2%) in one year. As the pandemic continued, self-employed individuals struggling to get through each day turned to savings banks and credit card companies after being blocked by the high barriers to bank loans. The balloon effect caused by financial authorities tightening bank loans to curb speculative borrowing (debt-financed investment) and overleveraging was also cited as a factor.

Financial authorities, judging that the risk of household debt defaults in the secondary financial sector is high, have announced plans to strengthen regulations. At the "Household Debt Risk Meeting" held yesterday, Do Gyu-sang, Vice Chairman of the Financial Services Commission, warned, "Risks are increasing mainly in the non-bank sector," and added, "If the increase in household loans in the non-bank sector continues, we will promptly eliminate regulatory arbitrage with the banking sector."

This message indicates that authorities will not overlook the growing number of borrowers who, due to the higher loan interest rates in the secondary financial sector but relatively more relaxed loan limits compared to banks, take out loans from banks and then additionally borrow from savings banks or other institutions in accordance with the Debt Service Ratio (DSR) standards.

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