Card Companies' Mid-Interest Loans Surge by 3.5 Trillion Won in Half a Year

"Finding a Way Amid Card Loan Regulations... Inevitable Despite Reduced Margins"

[Asia Economy Reporters Jehoon Yoo and Aeri Boo] The outstanding balance of mid-interest rate loans (for middle- and low-credit borrowers) by domestic credit card companies surged by more than 3 trillion KRW in just six months. Unlike before, when they were reluctant to offer mid-interest rate loans, card companies have turned to alternative products as they face difficulties securing profitability due to regulations on long-term card loans (card loans). The financial authorities’ efforts to promote mid-interest rate loans by strengthening incentives also played a role.

According to data from the Financial Supervisory Service obtained by Asia Economy on the 19th through the office of Park Jae-ho, a member of the Democratic Party, the outstanding balance of mid-interest rate loans from seven specialized card companies (Shinhan, KB Kookmin, Samsung, Hyundai, Lotte, Woori, Hana) stood at 4.5444 trillion KRW as of the end of June. This represents a 343% increase compared to the end of last year (1.0258 trillion KRW), an increase of 3.5186 trillion KRW in absolute terms.

Mid-interest rate loans refer to all unsecured credit loans executed for borrowers in the lower 50% of credit scores (grade 4 or below) that meet the interest rate ceiling requirements set by each industry sector. The interest rate ceiling for the card industry was 11.0% until the first half of this year.

At the end of 2020, two years ago, the outstanding balance of mid-interest rate loans from the seven card companies was only 495.4 billion KRW. However, it increased by 107% in one year to 1.0258 trillion KRW in 2021. As of the end of March 2022, it surged 180% year-on-year to 2.8677 trillion KRW. The trend shows nearly doubling every year.

Looking at the interest rates of mid-interest rate loans from the seven specialized card companies in the first half of this year, KB Kookmin Card had the lowest minimum interest rate at 3.9%, followed by Hyundai Card (4.5%), Woori Card (4.7%), Samsung Card (4.9%), Lotte Card (4.9%), Shinhan Card (5.3%), and Hana Card (7.91%). The average interest rate was lowest at Hyundai Card with 8.9%, followed by Shinhan Card (9.0%), Woori Card (9.2%), Samsung Card (9.3%), Lotte Card (9.6%), KB Kookmin Card (9.7%), and Hana Card (9.9%).

The increase in mid-interest rate loan performance is attributed to the expansion of related incentives by financial authorities and the card companies’ efforts to expand handling amid a decline in loans. To promote mid-interest rate loans, the financial authorities abolished the prior disclosure requirement for mid-interest rate loans starting this year, recognizing all loans that meet borrower and interest rate requirements as mid-interest rate loans. Also, card companies are subject to a regulation that limits the ratio of loan assets to core business assets to 30% or less, but mid-interest rate loans are reflected at 80%, not 100%, when calculating asset size.

Since this year, long-term card loans (card loans) have also been included in the borrower’s total debt service ratio (DSR) regulation, causing a decline in loans. Card companies are now seeking new opportunities through mid-interest rate loans. A card industry official said, "With the DSR regulation making it difficult to expand card loans, card companies are actively pursuing mid-interest rate loans, which have relatively smaller margins but allow continuous fund operation."

However, the industry is concerned whether mid-interest rate loans can continue to perform well amid the recent sharp rise in bond yields. As of the 17th, the 3-year AA+ rated credit finance bond yield was 5.711%, about 2.3 times higher than the beginning of the year (2.420%). The Bank of Korea’s Monetary Policy Committee is also effectively 'forecasting' an additional base rate hike in November. For credit finance companies such as card companies, which lack deposit functions, rising bond yields inevitably lead to higher loan interest rates to compensate.

In response, financial authorities are strengthening limits and incentives to promote mid-interest rate loans. From the second half of this year, the Financial Services Commission raised the interest rate ceiling for mid-interest rate loans in the card industry from 11.0% to 11.29%, adjusting the limit every six months according to fluctuations in funding costs. For card companies, the weighted average of funding costs is based on the total borrowing balance of the previous quarter at the time of interest rate change and the issuance rate of newly issued 3-year AA-rated card bonds at the end of the previous month.

Representative Park said, "It is positive that middle- and low-credit borrowers can use lower mid-interest rate loans thanks to the financial authorities’ incentives. However, as a sharp rise in interest rates is expected in the future, additional measures for real demand and vulnerable groups are necessary."

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