"Female Warrior, Emergency Plan Needed... Government Also Considering Bond Purchase Program"

Korea Institute of Finance Report on "Risk Factors and Future Challenges of Specialized Credit Finance Industry"

[Asia Economy Reporter Yu Je-hoon] Amid difficulties in fundraising faced by credit-specialized financial companies such as card and capital companies due to the base interest rate hike, there is a growing argument that the government should consider operating a bond purchase program to manage liquidity in emergencies.

According to the financial sector on the 5th, the Korea Institute of Finance stated in its report titled "Risk Factors and Future Tasks of Credit Specialized Financial Industry," published on the 3rd, "Along with the interest rate increase, regulatory authorities’ rule to keep the proportion of credit bonds in the total hedge assets related to securities firms’ derivative-linked securities below 8% is expected to reduce potential demand for credit bonds, negatively impacting fundraising," highlighting this point.

The Institute of Finance first identified common risks faced by credit companies as ▲ deterioration of credit quality in vulnerable borrowers’ loans ▲ worsening conditions for issuing credit bonds. Vulnerable borrowers tend to have a high proportion of unsecured loans and other loans, and due to borrower-level total debt service ratio (DSR) regulations, they may face difficulties in financing. Consequently, if loan defaults increase mainly among vulnerable borrowers, it could lead to a deterioration in the soundness of secondary financial institutions such as credit companies, where these borrowers have a relatively high share.

The worsening conditions for issuing credit bonds were also cited as a risk factor. Recently, credit bond yields have risen to around 5%, attracting active inflows from individual investors, but demand from major players such as securities firms and other financial institutions faces downward pressure due to various regulations. In fact, since 2020, financial authorities have regulated securities firms to maintain the proportion of credit bonds in their derivative-linked securities hedge assets below 8%, suppressing potential demand for credit bonds. Moreover, rapid interest rate hikes and the overall increase in credit risk in financial markets have pushed credit bond credit spreads (an indicator of credit risk) higher than during the COVID-19 crisis.

By sector, card companies have weakened core competitiveness due to reduced commission rates for small and micro merchants during the low-interest period and the application of borrower-level DSR regulations (card loans). Accordingly, they have recently focused on financial businesses such as cash services and revolving payment services (partial payment rollover agreements), but since these are likely to be used by relatively vulnerable groups, there is an assessment that credit risk issues may arise. Additionally, the rapidly expanding auto finance sector has raised concerns about declining profit margins due to intensified competition.

For non-card credit companies such as capital companies, risks include increased funding costs due to rising interest rates, strengthened household loan management, and intensified competition in their core auto finance business, leading them to adjust their business portfolios toward corporate finance and investment finance such as real estate project financing (PF). Although profitability is high, there are concerns that risks related to economic sensitivity could worsen business stability. The real estate PF sector is a representative example. The Korea Institute of Finance pointed out, "For non-card credit companies, the expansion of corporate and investment finance is likely to prolong asset recovery periods, and recent worsening conditions for issuing credit bonds due to rising interest rates may shorten funding structures. Therefore, liquidity risk management due to asset-liability maturity mismatches must be strengthened."

The Korea Institute of Finance advised that, as fundraising conditions worsen in the credit finance sector, authorities should also consider operating a bond purchase program. In the past, during financial crises, there were cases where the government supported fundraising for companies including credit companies through measures such as the 'Bond Market Stabilization Fund.' Senior Research Fellow Gu Jeong-han of the Korea Institute of Finance said, "Credit companies need to strengthen liquidity risk management and prepare contingency plans for fundraising," adding, "If fundraising difficulties arise due to increased interest rate volatility rather than problems within credit companies themselves, financial authorities should consider operating bond purchase programs as in the past."

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