[Concerns Over Poor Performance in Microfinance] Interest Rates Soar and Delinquency Rates Spike... Will Service Counters Also Be Blocked?

Tightening Household Loans Pushes Card Loan Interest Rates Up Over 1% in a Month

Delinquency Rates Surge
Cash Service Soars to 46%
Card Loans and Revolving Credit Also Reach 30% Range

Regulators' Restrictions Lead Some Card Companies to Reduce Limits and Take Other Measures

[Asia Economy Reporter Ki Ha-young] Kim Jeong-su (55, pseudonym), who runs a restaurant, visited a bank to apply for an additional loan after his sales plummeted by up to 80% following COVID-19, but was rejected. Last year, thinking he only needed to endure for one year, he hastily borrowed money from secondary financial institutions such as savings banks with high interest rates, which turned out to be a mistake. As the COVID-19 pandemic prolonged, he found himself unable to pay even utility bills like electricity and water, let alone the loan interest. Kim had no choice but to take out card loans (long-term loans) of 3 to 5 million won to put out urgent fires, but recently, with his credit limit drastically reduced, he has been suffering in silence.

As the number of low-income households surviving on high-interest card debt surges, warning signs of card loan defaults are lighting up. The interest rates on card loans, mainly used by low-credit, low-income individuals or multiple debtors borrowing from various financial companies, are soaring, and delinquency rates are also skyrocketing.

Recently, concerns have emerged that borrowers who borrowed money from card companies for "Yeongkkeul" (borrowing to the limit) or "Debt Investment" (borrowing to invest) amid stock market declines and cryptocurrency price volatility may lose their repayment ability and be pushed out of the formal financial sector.

A Time Bomb in Wallets... Interest Rates and Delinquency Rates Rising

The warning signs of card debt defaults have been triggered by rapidly rising already high interest rates. According to the Credit Finance Association's disclosure, as of the end of August, the average interest rates based on standard grades for seven major card companies (Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, Hana Card) were between 12.54% and 15.55% per annum. This represents an increase of 0.12 percentage points at the lower end and 1.59 percentage points at the upper end compared to the end of July (12.66% to 13.96% per annum). Lotte Card, which saw the largest increase, rose by 2.2 percentage points in one month to 15.5%.

Card loans are mainly used by low-credit, low-income individuals or multiple debtors who are excluded by the high thresholds of banks. As interest rates rise, their interest burden grows, and their ability to repay rapidly declines. In fact, card loan delinquency rates have surged. According to data submitted by the Financial Supervisory Service to Min Hyung-bae, a member of the National Assembly's Political Affairs Committee from the Democratic Party of Korea, the delinquency rate (over 1 month) for cash services (short-term loans) among the low-credit 9th grade group soared from 17.5% at the end of 2017 to 46.0% at the end of last year. During the same period, card loan delinquency rates rose from 18% to 33.5%, and revolving credit from 13.5% to 35.7%.

In particular, as the number of young people who borrowed money from multiple sources to join the debt investment craze has surged, the possibility of a significant increase in young people unable to repay their debts during the interest rate hike period is also rising. According to the Korea Institute of Finance, the card loan balance for people in their 20s increased by 1.141 trillion won at the end of last year, the highest growth rate among all age groups. The loan balance of multiple debtors aged 30 and under also grew by 16.1% to 130 trillion won compared to the end of the previous year, more than double the overall household loan growth rate of 8.4%.

Card Loan Regulations Targeted... Will Emergency Funds for Low-Income People Dry Up?

With warning signs on card debt lighting up, financial authorities have also started regulating card companies. Some card companies summoned by the authorities have begun reducing overall card loan volumes by cutting credit limits. Hyundai Card and Lotte Card have decided to reduce loan limits and refrain from marketing new loans depending on borrowers' repayment ability and debt status.

Moreover, it has been settled that card loans will be included in the additional household debt measures to be announced by the financial authorities this month, which adds to the burden for loan applicants. The most discussed measure is to advance the application timing of the Debt Service Ratio (DSR) to card loans. Currently, the individual DSR limit is 40% for banks and 60% for non-bank sectors, with card companies' regulation deferred until July next year. There is also speculation that the scope of DSR regulation may be expanded to include cash services. A financial authority official said, "Various management plans are under review."

Card companies plan to maintain supply for genuine demanders while reducing the overall card loan volume, but concerns are rising that emergency funding channels for low-income people may disappear. If financial authorities strengthen regulations, other card companies will inevitably lend to relatively high-credit borrowers with higher disposable income instead of middle- and low-credit borrowers, who are the main users of card loans, for risk management reasons. An industry insider lamented, "If loan regulations are tightened, loans to small business owners and low-credit borrowers with low disposable income among existing card loan customers will inevitably be reduced."

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