Record-Breaking Performance in Secondary Financial Sector... Is the Only Way Down Left?

Savings Banks Loan Balance 85 Trillion Won... Up 23.31% YoY
Unusual Growth in Secondary Financial Loans... 7 Times Steeper
Worsening Business Environment Due to Regulatory and Competitive Pressure
Will Targeting the Mid-Interest Market Provide a Breakthrough in the Second Half?

[Asia Economy Reporter Song Seung-seop] The secondary financial sector is struggling to find a way forward in the second half of the year. Despite recording record-breaking performance in the first half due to the low-interest rate trend and the balloon effect of commercial banks, many believe that the steep loan growth trend will be difficult to sustain. There are also warnings that small and medium-sized companies will inevitably face a decline in performance due to increasingly fierce business environments and regulatory risks imposed by authorities.

According to the Bank of Korea on the 19th, as of the end of May, the loan balance of domestic savings banks was recorded at 85.1114 trillion KRW. This is an increase of 16.0867 trillion KRW (23.31%) compared to the previous year. Compared to the end of last year (77.6675 trillion KRW), it increased by 7.4439 trillion KRW (9.58%) in just five months. Considering that the loan balance increased by 3.9743 trillion KRW during the same period the previous year, the growth rate has sharply accelerated.

The rapid increase in loans was also seen in mutual finance sectors. The loan size of mutual finance companies such as credit unions, Nonghyup, Suhyup, and the Korea Forest Service stood at 408.8613 trillion KRW as of May. This is an increase of 21.3043 trillion KRW (5.50%) compared to 387.557 trillion KRW in December last year. Compared to the previous year’s increase of only 2.79% (9.8318 trillion KRW), it nearly doubled. Card loans are also on the rise. According to the Financial Supervisory Service, the card loan balance of seven specialized companies (Shinhan, Samsung, KB Kookmin, Hyundai, Woori, Hana, and Lotte Card) recorded 33.1787 trillion KRW in the first quarter of this year. This is a 9.5% increase from 30.3047 trillion KRW in the same period last year, growing by about 2 trillion KRW in one year.

Compared to commercial banks, the loan growth in the secondary financial sector in the first half of this year is even more pronounced. According to financial authorities’ statistics, household loans in the entire secondary financial sector increased by 21.7 trillion KRW in one year. Since 2019, the increase in the secondary financial sector’s balance has been in the range of 3 to 4 trillion KRW. Although commercial banks recorded an increase of 41.6 trillion KRW, considering that the previous year’s increase was 40.7 trillion KRW, this is a moderate level.

A Thorny Business Environment in the Second Half... Will a Breakthrough Be Found?

However, despite record-breaking performance, the industry is facing a forecast that "only decline remains." This is because only a "thorny path" remains due to strong regulations to be implemented under the authorities’ leadership. Financial authorities are currently considering tightening the Debt Service Ratio (DSR) for the secondary financial sector to a level similar to that of commercial banks. Do Gyu-sang, Vice Chairman of the Financial Services Commission, recently emphasized, "We will seek ways to promptly eliminate regulatory arbitrage between banks and non-banks."

With the launch of a refinancing loan platform that brings the secondary financial sector together, competition is expected to become even fiercer. When interest rate comparisons can be made at a glance, companies will have to lower interest rates or increase loan limits to attract customers. The general view is that companies that fall behind in competition will find it difficult to record strong performance like this year.

To win in fierce competition, the industry is considering strategies to keep loan interest rates as low as possible even if margins are minimal. A low-margin, high-volume strategy focusing on mid-interest loans, which are less regulated by authorities, is also possible to gain many customers and transactions. A savings bank official explained, "Due to the reduction of the maximum interest rate and various regulations and changes in the business environment, the profit earned per loan inevitably decreases," adding, "The key is to secure as many customers as possible in the emerging mid-interest loan market."

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