"Amid Soaring Household Loans... Low-Income and Vulnerable Groups Could Not Secure Living Expenses (Comprehensive)"

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

The era of near-zero interest rates that began after the COVID-19 crisis has come to an end after 1 year and 8 months. On the 25th, the Monetary Policy Board of the Bank of Korea held a meeting to decide on monetary policy direction and raised the base interest rate by 0.25 percentage points from 0.75% to 1%. The photo shows a loan-related notice posted on the exterior wall of a bank in downtown Seoul on the same day. Photo by Moon Honam munonam@

[Asia Economy Reporter Kim Jin-ho] Since the prolonged economic downturn following COVID-19, the demand for livelihood funds among middle- and low-credit ordinary citizens has surged sharply, yet policy financing for these groups has rather contracted. This indicates a deepening polarization, meaning that even amid the recent explosion in household loans, vulnerable groups found it difficult to secure even basic living funds.

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

According to a survey by the Bank of Korea, from 2017 through the first half of this year, the annual average growth rate of household credit loans by borrower credit rating 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 ordinary citizens. According to the Bank of Korea, while household loans have surged, the amount borrowed by middle- and low-credit borrowers from financial companies stood at 115 trillion won as of March. The supply scale through policy financial products as of the first half of this year was 4.7 trillion won, an increase of only 470 billion won compared to the same period last year. Considering the worsening ordinary citizens' economy after the COVID-19 crisis, this is an extremely low growth rate.

The expected supply scale of policy financial products for ordinary citizens this year (9.6 trillion won) and Sa-itdol loans (2 trillion won) totals 11.6 trillion won, which is estimated to be about 10% of the total loan volume for middle- and low-credit borrowers. This is why policy financing that middle- and low-credit borrowers can rely on, when there are few places to borrow money, is described as "like reaching for the stars."

The problem is that considering the continued increase in loan demand from high-credit borrowers and the low profitability of mid-interest loans, banks have little incentive to expand loans to middle- and low-credit borrowers. The report analyzed that private mid-interest 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, it is also expected to be difficult to expand loans 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, this situation has led to recent cases where Saemaeul Geumgo and credit unions have completely suspended household loans.

Therefore, for banks with a high proportion of loans to high-credit borrowers, there are calls to promote credit supply expansion through policies such as "strengthening loan supply incentives" and "mandatory loan ratios" for middle- and low-credit borrowers. For non-bank financial institutions with a high loan ratio to middle- and low-credit borrowers, in addition to "loan supply incentives," there is also a growing need to induce additional credit supply expansion through policies that secure "interest rate competitiveness."

Jung Yoon-young, senior researcher at Hana Financial Management Research Institute, said, "It is important to establish a sustainable support system for ordinary citizens' finance," warning that "expanding the quantity of ordinary citizens' finance 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.