After the 'Loan Interest Rate Hike' Aftershock, 2nd and 3rd Tier Financial Sectors Also Hit... Vulnerable Borrowers Face a Loan Cliff

Card, Savings Banks, and Loan Businesses as Emergency Loan Channels for Vulnerable Borrowers Also Face Interest Rate Hike Aftermath
"To Prevent Illegal Private Lending, DSR Regulation Easing and Incentives Are Needed"

The preferential safe conversion loan, which converts variable-rate mortgage loans to long-term fixed rates starting at an annual rate of 3.7%, began accepting applications on the 15th. On that day, a bank in downtown Seoul was quiet. Photo by Moon Honam munonam@

[Asia Economy Reporters Yu Je-hoon, Song Seung-seop] The rise in loan interest rates following the base rate hike is spreading to the secondary and tertiary financial sectors, including mutual savings banks, specialized credit finance companies (card and capital companies), and loan companies. In particular, since the secondary and tertiary financial sectors serve as quick cash channels for vulnerable borrowers with relatively low credit ratings, their loan interest burdens are also increasing.

Card Loan Interest Rates Rise for the First Time in 9 Months... Red Light for Low-Credit Borrowers

According to the financial sector on the 30th, the average interest rate on long-term card loans (card loans) from seven major domestic card companies (Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, Hana) stood at 13.22% as of the end of last month, up 0.35 percentage points (P) from the previous month. This is the first increase in the average card loan interest rate in nine months since November last year.

Card loans are considered a representative quick cash channel for low-credit borrowers who find it difficult to obtain loans from commercial banks. Card companies have been lowering card loan interest rates through adjustment rates despite the overall interest rate hikes. This has been a desperate measure due to the inclusion of card loans in the Debt Service Ratio (DSR) regulations since last year and the reduced loan demand caused by rising interest rates.

However, as of the 28th, the interest rate on 3-year AA+ rated corporate bonds stood at 5.693%, more than double the rate at the beginning of the year (2.420%), showing an upward trend, which has also pushed up loan interest rates. A card company official said, "Although the absolute interest rate is not at a high level, the pace of the increase is unprecedentedly fast, even compared to the 2008 global financial crisis," adding, "Until now, we have operated with funds procured during the low-interest period, but going forward, loan interest rates are inevitably going to rise."

In savings banks, a sharp rise in interest rates is also beginning in earnest. As of July, the household loan interest rate in the savings bank sector was 10.53%, up 0.74 percentage points from 9.79% a month earlier. Compared to 9.22% in January, it has risen by 1.31 percentage points. Looking only at unsecured credit loans, the rate rose by 0.16 percentage points from the previous month to 14.7%.

For savings banks, the increase in loan interest rates is expected to be steeper than that of commercial banks. Unlike large banks that can borrow cheaply through bond issuance, savings banks rely on customer deposits for funding. To attract deposit customers, savings banks have rapidly raised deposit interest rates, and to prevent negative interest margins, they have no choice but to raise loan interest rates further. The deposit insurance premium rate, which is about five times higher than that of commercial banks, is also a reason for the high loan interest rates.

Realization of Loan Cliff for Vulnerable Borrowers

The loan cliff caused by interest rate hikes is also becoming a reality. As of the end of last month, the revolving credit (partial payment rollover agreement) outstanding balance of the seven major card companies increased by 2.2% from the previous month to 6.81 trillion KRW. The revolving credit outstanding balance has been hitting record highs every month since surpassing 6 trillion KRW at the end of last year. Revolving credit is a financial service where part of the credit card payment is paid first and the remaining amount is deferred to the next month, with interest rates approaching the legal maximum rate (20%), placing a heavy burden on borrowers. An industry insider said, "With card loan lending blocked by DSR regulations, low-credit borrowers' demand for quick cash has increased, leading to a rise in revolving credit."

Even loan companies, considered the last bastion in the formal financial sector, are focusing on high-credit and collateral-based loans. Although borrower risks are increasing, the legal maximum interest rate has been lowered from 24% to 20%, leaving no way to lend money. Last year, loan company loan balances increased to 14.6429 trillion KRW compared to the previous quarter, but the loans were mainly collateral loans rather than unsecured credit loans.

Loan supply from loan companies is also shrinking. At the end of last year, the number of loan company users was 1.12 million, down 110,000 since the legal maximum interest rate was lowered from 24% to 20% in July last year. Although policy finance has absorbed some vulnerable groups, the loan industry widely feels it has become difficult to supply new loans. Large loan companies such as Sanwa Loan and Joy Credit Loan are already withdrawing from the loan market.

Vulnerable borrowers pushed out of the loan industry have reportedly resorted to illegal private loans reluctantly. According to a survey by the Korea Institute of Financial Services on 7,158 low-credit borrowers (grades 6 to 10) with experience using loan companies or illegal private loans last year, 57.6% borrowed money despite knowing it was illegal. When future loan approvals are rejected by formal financial institutions, one in ten said they would accept illegal private loans.

Experts agree on the need for policy intervention to prevent low-credit borrowers from being driven to illegal private loans. Professor Seo Ji-yong of Sangmyung University’s Department of Business Administration (President of the Korea Credit Card Association) said, "Since the real estate market is stagnant and card loans do not contribute much to this, it is necessary to ease regulations on card loans for the sake of low-credit borrowers," adding, "It is also worth considering additional incentives to encourage private financial companies to offer low-interest refinancing loan products."

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