[Exclusive] When Banks Get Clogged, Prime Customers Turn to Mutual Finance... Ordinary People Are Being Pushed Out

Aftermath of Tightening Household Loan Restrictions

Half of New Household Loans from Nonghyup, Shinhyup, Suhyup, etc.

Top-tier Borrowers with Credit Ratings 1-2

As Bank Loan Limits Decrease

Concentration in Mutual Finance, for Investment and Speculation

Loan Opportunities for Non-prime Borrowers Actually Decrease

Pushed Outside the Formal Financial System

Loan Amount for Borrowers Rated 7 or Below Falls to 10.51% in First Half

[Asia Economy Reporters Kim Eunbyeol, Jang Sehee] This year, loans from mutual finance institutions to ‘top-tier’ borrowers with credit ratings of 1-2 have significantly increased. It is interpreted as a result of prime borrowers, who have already reached regulatory limits on loans from first-tier commercial banks, seeking funds in the secondary financial sector to not miss out on real estate and stock investment opportunities in the low-interest era. As mutual finance becomes a detour route for various speculative activities, non-prime borrowers who used to get loans from mutual finance are losing their place.

Half of Mutual Finance Household Loans Go to Prime Borrowers

According to data compiled by Min Hyungbae, a member of the National Assembly’s Political Affairs Committee from the Democratic Party of Korea, through the Financial Supervisory Service and various mutual finance central associations on the 27th, the scale of household loans to borrowers with credit ratings 1-2 from mutual finance institutions such as Nonghyup, Suhyup, Shinhyup, and the Korea Forest Cooperative reached KRW 17.5499 trillion in the first half of this year. Considering that the total new household loan amount of these financial institutions during the same period was KRW 37.7165 trillion, it means that 46.53%?nearly half?of the loans went to prime customers.

Borrowers classified as ‘top-tier’ with credit ratings 1-2 are generally understood to have a very low probability of defaulting on loans in the financial sector. They also have long-standing relationships with financial institutions, so there is no difficulty in obtaining loans from commercial banks. However, since the financial authorities issued a credit loan restraint order to banks last year, the loan limits for prime borrowers have decreased, and lists of ‘mutual finance and regional banks with high loan limits’ have started circulating on real estate cafes. Although they can get loans from commercial banks, prime borrowers have flocked to the secondary financial sector to borrow more money for investment. As a result, the proportion of prime borrowers in new household loans from mutual finance institutions surged by nearly 20 percentage points compared to last year (26.75%).

From July this year, the total debt service ratio (DSR) 40% regulation was expanded to apply to commercial banks, and with the possibility of the same DSR 40% regulation being applied to the secondary financial sector within the year, the ‘loan concentration’ in non-bank sectors has become more pronounced. A banking official explained, "If a borrower with a 1-2 credit rating takes out a household loan from mutual finance, it can be interpreted as clearly for investment or speculative purposes," adding, "It is highly likely that after fully utilizing the bank loan limit, they used non-bank loans for additional investment."

The reason top-tier customers are flocking to mutual finance is that asset prices such as real estate have surged, increasing the demand for funds. After the COVID-19 pandemic, with money supply increasing, housing and land prices rose sharply, but bank loan limits remained relatively small, causing borrowers with borrowing capacity to move to non-bank sectors. New housing mortgage loans from mutual finance institutions nearly reached KRW 10 trillion in the first half, and corporate secured loans also exceeded KRW 23 trillion. Most corporate loans were related to real estate.

Non-prime Borrowers Pushed Outside the Formal Financial System

From the perspective of non-bank sectors, the influx of prime borrowers is naturally welcome because attracting borrowers with high credit ratings reduces short-term uncertainty. The problem is that when only high-credit loans increase, the opportunities for financially distressed people to borrow decrease. While the amount of prime loans increased, the share of loans to borrowers rated 7 or below in new loans fell from 18.58% in 2018 to 16.72% in 2019, 13.78% in 2020, and down to 10.51% in the first half of this year. Those who could borrow within the formal system even at high interest rates are being pushed outside the system. Representative Min pointed out, "The loan regulations in the banking sector are causing a balloon effect, pushing high-credit borrowers into the secondary financial sector," adding, "This will fail the goal of loan regulations aimed at curbing real estate speculation by high-income earners and may cause side effects where those who mainly use the secondary financial sector lose places to raise funds." He emphasized, "Financial authorities must prepare meticulous measures that block real estate speculation while smoothly supplying funds to ordinary citizens."

Although the increased loans are to high-credit borrowers, since these borrowers have already maxed out their limits at commercial banks, the possibility of loan defaults cannot be ruled out if a market shock occurs in the future. When shocks hit asset prices such as real estate or stocks, the burden may fall on the secondary financial sector like mutual finance because bank loans must be repaid first.

Banks must maintain an average DSR ratio of 40%, but mutual finance institutions only need to meet a target of about 160%, and savings banks about 90%. Since only the average must meet the regulatory ratio, many loans exceed a DSR of 100%. Among new household loans from mutual finance, loans with a DSR exceeding 100% have already surpassed 40%. The proportion of loans exceeding an 80% loan-to-value ratio (LTV) (based on outstanding balance) also reaches 43%. Especially as the Bank of Korea has recently raised the base interest rate, entering a rate hike cycle, the interest burden on loans with an average interest rate exceeding 3% inevitably increases. Seventy-three percent of new loans from mutual finance in the first half were variable rate.

Professor Andonghyun of Seoul National University’s Department of Economics said, "Since many borrowers went to the secondary financial sector because it was difficult to get additional loans from banks, these loans can be considered relatively risky or prone to default," adding, "Even if the credit rating is high, the risk is significant because bank loans must be repaid first."

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