Small Business Owners Struggling with COVID-19 and Regulations, 'Surviving' with Savings Bank Loans

Top 5 Savings Banks' Loan Balances in H1 Reach 32.2819 Trillion KRW
8% Surge in One Quarter... Twice as Steep as Previous Quarter
Rapid Growth Especially in COVID-19 Vulnerable Sectors
Rising Loan Thresholds and Interest Rate Hikes Increase Borrower Burden

Despite government and financial authorities' financial support policies, the number of small business owners turning to savings banks has significantly increased this year. This is interpreted as part of a 'balloon effect,' where tighter loan regulations raise the threshold at commercial banks, pushing borrowers toward secondary financial institutions. However, given that secondary financial institutions are mainly used by medium- and low-credit borrowers, there are concerns that additional regulations and the full-scale rise in benchmark interest rates will increase the burden on vulnerable borrowers and make borrowing even more difficult.

According to the industry on the 1st, the loan balance of the five major savings banks?SBI, OK, Welcome, Pepper, and Korea Investment?reached 32.2819 trillion won in the first half of this year. This is an increase of 2.4981 trillion won (8.3%) from 29.7838 trillion won in March. Considering that the loan increase in the previous quarter was 1.3723 trillion won (4.8%), the growth rate has doubled. This is the first time in the past year that the loan balance has increased by more than 8% in a single quarter.

By industry, loan growth was particularly notable in sectors vulnerable to COVID-19. Loans in the wholesale and retail sectors increased simultaneously across all savings banks. They grew by 236.6 billion won (13.6%) over six months, reaching 1.9673 trillion won. Welcome Savings Bank and Korea Investment Savings Bank saw growth rates of 30.1% and 35.2%, respectively. At OK Savings Bank, loans to small and medium-sized enterprises classified under the food and beverage sector increased from 240.8 billion won to 253.3 billion won, while at Welcome Savings Bank, loans in the service sector grew from 142 billion won to 153.2 billion won.

Overdraft Loans Also Expanded in Secondary Finance... Borrowing Will Become More Difficult

Overdraft loans, which usually do not sell well at savings banks due to high interest rates, have also rapidly expanded. Except for Pepper Savings Bank and Korea Investment Savings Bank, overdraft loans have annual interest rates that rise to the maximum legal limit. Most have a short maturity of one year. The total overdraft loan volume handled by the five savings banks reached 2.3876 trillion won, increasing by 49.57% (791.2 billion won) in half a year.

Non-performing loans that are practically unrecoverable have also increased accordingly. The representative bad loan indicator, 'fixed overdue loans,' rose by 14.2% over one year to 1.295 trillion won. 'Non-performing loans,' which combine doubtful and estimated loss loans, increased by 20.67% to 950.3 billion won. This disclosure does not reflect loan maturity extensions and interest payment deferrals, so the actual scale is expected to be larger. Although the government and financial authorities have invested funds to support small business owners and vulnerable sectors, the spread of COVID-19 and prolonged Level 4 social distancing measures have led financially vulnerable groups to significantly increase their debt in secondary financial institutions.

Borrowing for vulnerable groups is expected to become more difficult even in secondary financial institutions. This is because the household loan management policy, which started earlier this year, has been strengthened, and some regulations are uniformly applied to secondary financial institutions. Financial authorities recommended that the total household loan growth rate at savings banks be limited to 21% compared to last year, but many have already reached 80-90% of the target.

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