Authorities Watching, Competition Fierce... Savings Banks Deeply Concerned Over Intense Mid-Interest Rate Loans

Savings Banks Actively Target Mid-Interest Loans
Financial Authorities Worried About Regulations as Loans Increase
Intense Competition with Internet Banks, Big Tech, and P2P Participation

[Asia Economy Reporter Song Seung-seop] The savings bank industry, targeting the mid-interest rate loan market, appears to be facing deep concerns. As mid-interest rate loans become more prevalent, the possibility of intervention by financial authorities increases, and competition is intensifying due to market entry by internet-only banks, big tech (large information and communication companies), and online investment-linked finance (P2P) firms.

Savings Banks Worry About Financial Authorities' Regulations as Mid-Interest Rate Loans Increase

According to the Korea Federation of Savings Banks on the 26th, the number of mid-interest rate loan products handled by the savings bank industry in the fourth quarter of last year was 85, an increase of 18 compared to the same period the previous year. Compared to the fourth quarter of 2018 (47 products), this represents an increase of more than 55% in two years. The number of mid-interest rate loan products scheduled to be supplied in the first quarter of next year is also expected to reach 95.

The loan volume is also rapidly increasing. According to the annual handling status disclosed by the Korea Federation of Savings Banks, the cumulative amount of mid-interest rate unsecured loans by the five major savings banks (SBI, OK, Pepper, Korea Investment, Welcome) was 3.3055 trillion KRW at the end of 2019, a 48% increase compared to 1.6113 trillion KRW the previous year. With the statutory maximum interest rate being lowered and the threshold for mid-interest rate loans expected to decrease, the loan volume is likely to grow as related products continue to be supplied.

The industry as a whole is responding quickly to the changing environment, but the underlying sentiment seems somewhat complicated. A savings bank official said, "If loans increase, it is obvious that the financial authorities will not have a favorable view due to reasons such as household debt, loan volume, and delinquency rates," adding, "We try to align as much as possible with the overall stance of the financial authorities to avoid drawing negative attention."

Another savings bank official hinted, "With the public opinion tightening loans by commercial banks and internet-only banks, there is a nervous atmosphere fearing that the backlash might hit the savings bank industry."

However, it seems unlikely that financial authorities will easily take direct actions such as audits or data requests targeting savings banks. A Financial Supervisory Service official said, "Loan regulations have been influenced by 'debt investment (borrowing to invest in stocks)' and 'Eoljuka (pulling together all resources to buy a home),' but savings banks have a high usage rate among small business owners," adding, "If the scale of mid-interest rate loans grows significantly, we may consider it, but not at this time."

Internet-Only Banks Lead Fierce Competition in Mid-Interest Rate Loan Market

The aggressive mid-interest rate loan strategies of internet-only banks, big tech, and P2P firms are also cited as risks. KakaoBank recently lowered the maximum limit of its high-credit worker loans from 150 million KRW to 100 million KRW to expand mid-credit loans, and K Bank, planning a 400 billion KRW capital increase in the first half of this year, also intends to add mid-interest rate loan products. Moreover, some top P2P firms have structured over 70% of their loan products as mid-interest rate loans, indicating that competition is expected to become increasingly fierce.

Savings bank officials say there is no immediate need for alarm but are closely monitoring the situation. One industry official stated, "If mid-interest rate loan products in other industries mainly target credit grades 4 and 5, savings banks specialize in grades 6 and 7, so they still have competitiveness," but also noted, "With internet banks leading the way, there is a gradual penetration into the mid- and low-credit borrower loan market, so it does feel threatening."