Rising Concerns Over Insolvency Due to 'Balloon Effect' in Secondary Financial Sector... Will Access to Quick Loans for Ordinary People Be Blocked? (Comprehensive)

Card Loan Usage 28.9 Trillion Won... Up 13.8% YoY
Delinquency Rate Also Surges... Concerns Over Multiple Debtor Defaults Increase
Authorities' Household Loan Regulations Lead to Card Companies Reducing Limits

[Asia Economy Reporters Kwangho Lee and Hayoung Ki] #. 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 just needed to survive for one year, he hastily borrowed money from second-tier 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 KRW to put out urgent fires, but recently, his credit limit was drastically reduced, causing him distress.

#. University student Lee Min-hee (pseudonym) quit her part-time job at a restaurant as evening operations were reduced due to COVID-19. She tried to find a new part-time job to cover rent and living expenses but found it difficult. Meanwhile, her credit card payment date approached, and with insufficient funds in her bank account, she reluctantly applied for revolving credit (payment amount rollover agreement) to avoid card payment delinquency. Lee said, "It is still difficult to find a part-time job, and as I use my card every month for living expenses, the amount I have to repay each month keeps increasing, which worries me."

Card debt, mainly used by low-credit borrowers and vulnerable groups who find it difficult to borrow money from banks, has reached an all-time high. This is due to an increase in livelihood loans amid the prolonged COVID-19 pandemic, the craze for debt-financed investment ("debt investment") and borrowing to the limit ("Yeongkkeul"), and the closure of bank counters amid soaring housing prices, leading people to turn to card loans. Experts warn that as the interest rates on already high-interest card loans continue to rise, if these groups?considered the 'weak link' in household debt?cannot roll over their debts, a domino effect of credit defaults could explode.

[Image source=Yonhap News]

Card Loan Usage Hits Record High...Concerns Over Multiple Debtor Defaults

According to data submitted by the Financial Supervisory Service to Yoon Chang-hyun, a member of the National Assembly's Political Affairs Committee from the People Power Party, the outstanding balance of card loans (long-term loans) from the top five credit card companies (Shinhan, Samsung, KB Kookmin, Hyundai, Lotte) reached 27.919 trillion KRW in the first half of this year. This is a 13.0% (3.647 trillion KRW) increase compared to 24.272 trillion KRW in the same period last year. Compared to the end of last year (26.367 trillion KRW), it increased by 5.5% (1.552 trillion KRW), marking the largest increase in the past three and a half years.

The outstanding balance of cash services (short-term loans) also surged. The cash service balance in the first half of this year was 5.111 trillion KRW, up 3.0% from 4.954 trillion KRW in the same period last year. The revolving credit balance, where consumers buy goods with credit cards in a lump sum and pay part of the amount in the following months, also grew significantly. According to data received by Jeon Jae-su, a member of the Democratic Party of Korea, from the Financial Supervisory Service, the revolving credit balance of eight specialized credit card companies (the five above plus Woori, Hana, and BC Card) reached 5.8157 trillion KRW in the first half of this year, a 19.2% increase over three and a half years.

An industry insider explained, "This is due to the combined effect of strengthened bank loan regulations since the end of last year and the so-called 'debt investment' and 'Yeongkkeul' trends. Recently, to block the balloon effect, financial authorities have tightened card loans, causing loan demand to shift toward cash services and revolving credit."

Delinquency Rates Rise Among Low-Credit Borrowers...Card Loan Interest Rates Also Climbing

As the number of low-income households surviving on high-interest card debt surges, concerns about card loan defaults are growing. The interest rates on card loans, mainly used by low-credit, low-income borrowers and multiple debtors borrowing from several financial institutions, are soaring, and delinquency rates are also rising.

According to disclosures by the Credit Finance Association, as of the end of August, the average interest rates based on standard credit grades for seven specialized credit card companies (Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, Hana Card) ranged from 12.54% to 15.55% per annum. This is 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%). Lotte Card, which saw the largest increase, raised its rate by 2.2 percentage points in one month to 15.5%.

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

Especially, with the surge in young people borrowing from multiple sources to join the debt investment craze, combined with the timing of interest rate hikes, the number of young people unable to repay their debts is expected to increase significantly. According to the Korea Institute of Finance, the card loan balance for people in their 20s increased by 1.141 trillion KRW 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 rose by 16.1% to 130 trillion KRW compared to the end of the previous year, more than double the overall household loan growth rate of 8.4%.

[Image source=AP Yonhap News]

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

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

Additionally, it has been settled that card loans will be included in the additional household debt measures to be announced by financial authorities later this month, which adds to the burden for loan applicants. One of the first measures under consideration 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 DSR regulation scope 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 demand while reducing overall card loan volumes, but concerns are rising that emergency funding channels for low-income households may disappear. If financial authorities strengthen regulations, other card companies may have no choice but to lend primarily to high-credit borrowers with relatively higher disposable income rather than the main users of card loans?middle- and low-credit borrowers?as a risk management measure. An industry insider lamented, "If loan regulations tighten, card companies will inevitably reduce loans to small business owners and low-credit borrowers with low disposable income among existing card loan customers."

Experts point out that strong regulations alone are not the solution. Professor Seo Ji-yong of the Department of Business Administration at Sangmyung University warned, "Many users of card loans borrow for livelihood purposes rather than for home purchases or investment. If card loan regulations are tightened, small business owners and other low-income households will have nowhere to borrow money, which could negatively impact the market economy."

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