Record High 2nd Tier Financial Loan Amount... Where to Find Growth Opportunities in the Second Half (Comprehensive)

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, which recorded record-breaking performance in the first half of the year, is now contemplating its strategy for the second half. The business environment is becoming increasingly competitive amid the reduction of the legal maximum interest rate, and regulatory measures from authorities are also anticipated. Although loan balances have grown substantially due to the low-interest-rate trend and the balloon effect from commercial banks, there are skeptical views about whether the steep loan growth will continue. In particular, there are warnings that if loan regulations start strongly, small and medium-sized companies will inevitably face a decline in performance.

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

The rapid increase in loans is also true for mutual finance sectors. The loan size of mutual finance companies such as credit unions, Nonghyup, Suhyup, and the Forestry Cooperative reached 408.8613 trillion won as of May. This is an increase of 21.3043 trillion won (5.50%) compared to 387.557 trillion won in December last year. Compared to the previous year, which saw only a 2.79% (9.8318 trillion won) increase, the growth nearly doubled. In particular, Nonghyup's loans decreased by 390 billion won in the first half of 2020 but increased by 8.16 trillion won within a year.

Card loans are also surging. According to the Financial Supervisory Service, the card loan balance of seven specialized companies (Shinhan, Samsung, KB Kookmin, Hyundai, Woori, Hana, Lotte Card) recorded 33.1787 trillion won in the first quarter of this year. This is a 9.5% increase from 30.3047 trillion won in the same period last year, growing by about 2 trillion won 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 won in one year. Since 2019, the loan balance growth in the secondary financial sector has been in the range of 3 to 4 trillion won. Although commercial banks recorded an increase of 41.6 trillion won, considering that the previous year's increase was 40.7 trillion won, this is a moderate level.

A Thorny Business Environment in the Second Half... Will They Find a Breakthrough?

Do Gyu-sang, Vice Chairman of the Financial Services Commission. Photo by Kim Hyun-min

However, despite record-breaking performance, the industry is facing a forecast that "only declines remain." This is because only a "thorny path" remains due to strong regulations led by authorities. Financial authorities are currently considering tightening loans in the secondary financial sector to a level similar to that of commercial banks. On the 15th, Do Gyu-sang, Vice Chairman of the Financial Services Commission, held the "1st Household Debt Risk Management Task Force" and emphasized, "We will devise measures to promptly eliminate regulatory arbitrage between banks and non-bank sectors."

Additional regulation of the Debt Service Ratio (DSR) is being strongly discussed. Currently, the DSR for savings banks and non-bank sectors is 60%. In contrast, commercial banks regulate borrowers at 40%, a stricter level. It is known that some borrowers who cannot get loans from commercial banks move to the secondary financial sector to borrow the difference. If the DSR level in the secondary financial sector is tightened, the loan growth will inevitably slow down. The credit card industry plans to introduce DSR regulations by July next year, but the timing may be moved up.

The launch of a refinancing loan platform, which brings together the secondary financial sector in one place, is expected to intensify competition. The refinancing loan platform is a service that allows users to view and compare loan product conditions from all financial companies on a single mobile application (app). When interest rates can be compared at a glance, companies must lower interest rates or increase loan limits to attract customers. The general view is that companies that lose in this 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 increase performance and transaction volume. 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 will inevitably decrease," adding, "The key is to secure as many customers as possible in the emerging mid-interest loan market."

There is also a strategy to target the digital sector. Recently, many secondary financial institutions have been pursuing partnerships with various digital platform companies to realize non-face-to-face financial services. Since the deposit interest rate conditions are better than those of traditional banks, there are many opportunities to attract customers in the digital domain, which is free from relationship-based sales. Another savings bank official emphasized, "We plan to strengthen corporate finance and expand high-quality assets such as securities and retirement pension management," adding, "We will focus on securing stable deposit procurement channels and diversify revenue streams."

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