'Impact of Mid-Interest Loans'... Increasing Household Loan Defaults at KaBank and KeBank

[Asia Economy Reporter Eunju Lee] This year, the non-performing loans (NPLs) in household loans of KakaoBank and K Bank have significantly increased. It is analyzed that as internet banks steadily expanded their promised ‘mid-interest rate loans’ to financial authorities, the scale of bad loans that are difficult to recover also increased.

According to major banks' management disclosures on the 16th, the balance of non-performing (below classified) loans of KakaoBank and K Bank in the first half of this year increased significantly compared to the same period last year. KakaoBank's non-performing loan balance recorded 71.1 billion KRW, an increase of 21 billion KRW from 50.1 billion KRW in the same period last year. The non-performing loan ratio (non-performing loans divided by total loans) rose by 0.05 percentage points (p) to 0.27% from 0.22% in the same period last year. In the case of K Bank, the increase in non-performing loans was even larger. The non-performing loan balance, which was 27.6 billion KRW in the first half of last year, nearly doubled to 55.4 billion KRW this year, an increase of 27.8 billion KRW. The non-performing loan ratio rose by 0.09%p from 0.54% in the first half of last year to 0.63%.

Non-performing loans are a key indicator representing bad loans. They refer to loans where the bank has lent money but failed to collect principal and interest on time. This includes bad loans with principal and interest overdue by more than three months. The bad loans of the two internet banks were all recorded in household loans. In the case of Toss Bank, there was no comparative indicator as it has not yet reached one year since its launch. As of the first half of the year, Toss Bank's non-performing loan balance was 5.4 billion KRW, and the non-performing loan ratio was 0.13%, both better than the two banks.

During the same period, the scale and ratio of non-performing loans of major commercial banks remained stable. KB Kookmin Bank's non-performing loan balance improved from 642.5 billion KRW in the first half of last year to 508.4 billion KRW, and the non-performing loan ratio improved from 0.20% to 0.14%. Woori Bank's non-performing loan balance decreased by 174.5 billion KRW from 694.3 billion KRW to 519.8 billion KRW, and the non-performing loan ratio also fell by 0.07%p from 0.25% to 0.18%. Shinhan Bank also saw a reduction in non-performing loan balance from 831.4 billion KRW to 654.5 billion KRW, a decrease of 176.9 billion KRW. The non-performing loan ratio dropped by 0.08%p from 0.28% to 0.21%.

The deterioration of bad loan indicators for KakaoBank and K Bank is attributed to the impact of the expanded mid-interest rate loans since last year. Mid-interest rate loans are unsecured loans offered at an interest rate cap of 6.5% per annum to customers in the lower 50% of personal credit scores. As the loan volume for mid-to-low credit borrowers increased, the amount of bad loans naturally increased as well. According to the Bankers Association disclosure, as of the end of June, the proportion of unsecured loans to mid-to-low credit borrowers (mid-interest rate loans) was 22.2% for KakaoBank and 24.0% for K Bank. The targets set by the two banks for the end of this year are 25% for KakaoBank and K Bank, and 42% for Toss Bank.

However, since bad loan indicators are based on past defaults, it is difficult to exclude the possibility of future defaults that have not yet been reflected in statistics. In a phase where the base interest rate continues to rise, loan interest rates will increase further, and with the full-scale start of business loans from this year, the default rate may increase in the future. A KakaoBank official explained, “In the second half of last year, the scale of mid-interest rate loans was about 10%, but now it has increased to 22.2%. It seems to be an effect of increased classified loans below fixed and delinquency rates in the process of practicing inclusive finance, but it is at a sufficiently manageable level.” A K Bank official also said, “K Bank has significantly increased the total loan amount since last year, especially increasing the proportion of loans to mid-to-low credit borrowers from 16.6% at the end of last year. The deterioration in indicators is a result of rapid growth, and we will manage it sufficiently through delinquency rate management and advancement of CSS (credit scoring system).”

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