Vulnerable Groups Unable to Receive Policy Financing... Pushed into High-Interest Loans

Hana Financial Research Institute Report
Household Loan Growth Continues
But Loans for Medium and Low Credit Borrowers Decline

[Asia Economy Reporter Jin-ho Kim] Since the prolonged economic downturn following COVID-19, the demand for livelihood funds among middle- and low-credit score citizens has surged sharply, yet policy financing for these groups has rather contracted. This indicates a deepening polarization, as vulnerable groups have found it difficult to even secure living expenses despite the recent surge in household loans over the past few years.

According to the report "Current Status and Revitalization Measures of the Low-Income Financial Market" published on the 1st by Hana Financial Management Research Institute, despite the recent increase in household loans, loans from financial institutions to middle- and low-credit borrowers have decreased.

According to a survey by the Bank of Korea, the average annual growth rate of household credit loans by borrower credit rating from 2017 to the first half of this year showed an increase for high-credit borrowers (13.3%) and middle-credit borrowers (5.7%). In contrast, low-credit borrowers decreased by -3.7%.

In particular, middle- and low-credit borrowers, who have been neglected by first-tier financial institutions such as banks, are also not properly receiving government-supported policy financial services for low-income citizens. According to the Bank of Korea, amid the surge in household loans, the amount borrowed by middle- and low-credit borrowers from financial institutions stood at 115 trillion KRW as of March. The supply scale through policy financial products was 4.7 trillion KRW in the first half of this year, increasing by only 470 billion KRW compared to the same period last year. Considering the worsening low-income economy since the COVID-19 crisis, this is an extremely low growth rate.

The expected supply scale of policy financial products for low-income citizens (9.6 trillion KRW) and Sa-itdol loans (2 trillion KRW) this year totals 11.6 trillion KRW, which is estimated to be around 10% of the total loan volume for middle- and low-credit borrowers. This is why policy financing, which middle- and low-credit borrowers with limited borrowing options can rely on, is described as "like reaching for the stars."

The problem lies in the fact that, considering the continued increase in loan demand from high-credit borrowers and the low profitability of mid-interest rate loans, banks have little incentive to expand loans to middle- and low-credit borrowers. The report analyzed that private mid-interest rate loans, which have incentives excluding total loan volume limits, have a fixed interest rate ceiling (6.5%), so profitability decreases relative to risk during periods of base rate hikes.

For mutual finance institutions, credit card companies, and savings banks, loan expansion is also expected to be difficult due to the narrowing interest margin caused by base rate hikes and reductions in the legal maximum interest rate, as well as household loan regulations. In fact, recent situations have arisen where Saemaeul Geumgo and credit unions have completely suspended household loans.

Jung Yoon-young, senior researcher at Hana Financial Management Research Institute, emphasized, "It is important to establish a sustainable support system for low-income financial services," warning that "quantitative expansion of low-income financial services amid deferred defaults due to financial support for vulnerable sectors could rather increase the risk of insolvency."

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