The Bank of Korea Raises Warning Level on "Delinquency Among Mid-to-Low Credit Borrowers in Secondary Financial Sector" Amid Interest Rate Hikes

Bank Household Loans Slow Down
2nd Tier Financial Institutions like Mutual Finance See Faster Loan Growth
Low-to-Mid Credit Borrowers Near 73% Share
Bank of Korea Warns "Watch for Vulnerable Sector Defaults"

[Asia Economy Reporter Jang Sehee] As the pace of household loan growth in the secondary financial sector, such as mutual finance sought by low- to medium-credit borrowers, accelerates, the Bank of Korea’s vigilance is increasing. Considering that the loan growth rate of commercial banks is slowing due to tightening by financial authorities, the expansion of loans in the secondary financial sector can be interpreted as a ‘balloon effect.’ In particular, with the possibility of a base interest rate hike next month remaining high, the Bank of Korea is expected to continuously raise the need for managing loans to low- to medium-credit borrowers.

According to the Bank of Korea on the 10th, the year-on-year growth rate of non-bank household loans, which was -0.1% in August last year, sharply rose to 3.4% in January this year and then increased further to 9.0% in August. In September, it grew even more to 9.3%. This trend is opposite to that of the primary financial sector, where the loan growth rate fell to single digits in September.

Considering the slowdown in household loan growth of commercial banks due to loan regulations by financial authorities, it can be interpreted that loans are concentrating in non-bank sectors such as mutual savings banks and Saemaeul Geumgo.

Loans in the secondary financial sector mainly involve a high proportion of low- to medium-credit borrowers, raising concerns about potential defaults. As of March, the proportion of household loans by credit rating showed that the share of low- to medium-credit borrowers in the banking sector was 16%, whereas in the non-bank sector it reached 72.7%.

The relatively higher interest rates on non-bank household loans compared to banks also increase the possibility of defaults. According to the weighted average interest rates of financial companies in October, the household loan interest rate of general deposit banks was 3.46% per annum, while Saemaeul Geumgo showed 3.87%.

Park Jongseok, Deputy Governor of the Bank of Korea, said on the 9th, "While the household loan growth of commercial banks has slowed, some demand seems to have shifted to the non-bank sector," adding, "We need to pay close attention to potential defaults in vulnerable sectors going forward."

Deputy Governor Park also stated, "Interest rates on loans in the non-bank sector are generally higher than those in banks," and "From next year, regulations such as the Debt Service Ratio (DSR) on the non-bank sector are expected to act as factors slowing the increase in household loans."

If the base interest rate hike materializes in January next year, the issue of loans to low- to medium-credit borrowers is expected to become more pronounced. Although the Bank of Korea raised the base rate twice this year, it maintains the stance that it is ‘still accommodative.’ There is an interpretation that additional rate hikes are likely next month.

Experts agree that the risk level of the non-financial sector should be assessed first, and preparations should be made in advance for the default risk of low- to medium-credit borrowers.

Professor Jeong Seeun of the Department of Economics at Chungnam National University emphasized, "Measures to minimize the default risk of low- to medium-credit borrowers in the non-bank sector should be proactively prepared, and for vulnerable groups, financial products for ordinary citizens such as Haetsal Loan should be actively utilized." She added, "Since there is excessive investment in asset markets such as real estate, maintaining low interest rates continuously will increase risks further," and "A comprehensive assessment of the entire non-financial sector should also be conducted."

Kim Youngil, a research fellow at the Korea Development Institute (KDI), previously stated in the report ‘Understanding the Risks of Household Debt and Designing Risk Management Systems,’ "The debt ratio, debt repayment ratio, and delinquency rate of low-income households are high, raising concerns from the perspective of social stability," and added, "There is a need to reorganize relief systems for the economic recovery of individual debt defaulters."

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