Financial Companies Taking Loan Management Measures Amid 'Total Volume' Pressure... Growing Concerns Over Balloon Effect (Comprehensive)

As KakaoBank and Others Reach Loan Thresholds, Total Volume Management Under Review
Household Loans in Secondary Financial Sector Up 27.4 Trillion KRW from Jan to Jul
Mutual Finance Sector Increased by 12 Trillion KRW, Steepest Growth
Financial Authorities: "Credit Loans in Secondary Finance Also Limited Within Annual Income"
Experts Warn: "Beware of Another Balloon Effect"

[Asia Economy Reporters Sunmi Park, Hyungil Oh, Seungseop Song] As financial companies such as KakaoBank and Samsung Life Insurance approach their lending limits, they are beginning to manage total loan volumes, intensifying the ‘money drought’ for ordinary citizens. This comes as financial firms consider reducing loans or raising interest rates. Although financial authorities are attempting to intervene, the market is responding that a lending cliff and balloon effect have begun.

According to the financial sector on the 24th, KakaoBank’s household loan balance as of the end of June was 23.1265 trillion KRW, an increase of 2.8133 trillion KRW from 20.3132 trillion KRW at the end of last year. In terms of growth rate, this is 13.8%, the highest level in the financial industry. This is more than double the annual household loan growth target of 5-6% applied to commercial banks by financial authorities, and far exceeds NH Nonghyup Bank’s 7.1% growth rate, which decided to completely halt new mortgage loans due to exceeding the target.

Samsung Life Insurance’s household loan bonds also increased by 1.6625 trillion KRW (4.4%) to 39.6012 trillion KRW as of the end of June compared to the end of last year. This exceeds the annual household loan growth target of 4.1% agreed upon by financial authorities and the insurance industry. Samsung Life accounted for half of the insurance industry’s total household loan increase of 3.4 trillion KRW in the first half of the year.

As financial authorities pressure for stronger management, KakaoBank is considering reducing personal credit loan limits for high-credit borrowers, even if it does not completely stop lending. This is based on the judgment that reducing loan limits for high-credit borrowers is inevitable to expand mid-interest rate loans in line with the financial authorities’ emphasis on policies to include financially marginalized groups.

Samsung Life Insurance, which has more mortgage loans compared to other companies and has reached its lending limit, is also contemplating measures to meet its total loan volume target by August. The market expects measures such as raising the threshold for new loans and reducing preferential interest rates.

Savings Banks and Mutual Finance Also Fear Balloon Effect... "Must Prevent Proactively"

The situation is similar in the secondary financial sector. Due to commercial banks raising interest rates and reducing loan limits since the beginning of the year, household loans in the secondary financial sector increased by 27.4 trillion KRW from January to July this year. Considering that there was a decrease of 2.4 trillion KRW during the same period last year, this is a significant increase. In particular, the mutual finance sector increased by 12.4 trillion KRW, showing the steepest growth among sectors. Credit card companies and savings banks also increased by 5.4 trillion KRW and 5.3 trillion KRW, respectively.

Internet-only banks like KakaoBank face the task of ‘expanding mid-interest and mid-to-low credit loans’ under the government’s policy to strengthen inclusive finance, resulting in a household loan growth rate exceeding 13%, the highest in the industry as of the first half of the year. An industry insider said, "The mid-interest loan portion is somewhat relaxed within the household loan growth target, but other credit loans and overdrafts are included in total household loan management. Internet banks are still in the growth stage and smaller in scale compared to commercial banks, so there is a somewhat lenient atmosphere."

Trends in Household Loan Increase and Decrease in the Financial Sector (Based on Financial Supervisory Service Preliminary Data). Photo by Financial Services Commission.

Financial authorities plan to apply the same regulations to the secondary financial sector as to commercial banks to block the balloon effect, but there are concerns that this will cause side effects such as a lending cliff. Authorities have currently requested that credit loan limits in the secondary financial sector be restricted to within annual income. Since this measure has been implemented in commercial banks, it aims to prevent borrowers seeking additional loans from moving to the secondary financial sector. However, many in the industry believe that this measure will not be powerful enough to prevent the balloon effect. Although savings banks handle loans up to 1.2 to 1.8 times the annual income, actual cases of receiving such loans are extremely rare.

Nevertheless, under pressure from financial authorities, savings banks appear to be considering their own household loan management measures. While none are considering unilateral suspension of loan products, typical measures include reducing loan limits or setting stricter cut-off criteria during screening. In such cases, financially vulnerable groups may flock to loan companies or P2P firms. This has led to criticism that policies implemented to prevent the balloon effect may create another balloon effect.

Professor Tae-yoon Sung of Yonsei University’s Department of Economics advised, "Primary and secondary financial sectors should basically be regulated to a similar extent. Apart from this measure, since there is concern about the balloon effect of illegal private loans growing, financial authorities need to consider countermeasures." He added, "At this stage, it seems necessary to adjust various conditions such as interest rates."

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