Savings Banks Face Fierce Competition and Regulatory Pressure... "Even with Good Mid-Interest Rates, Concerns Remain" (Comprehensive)

Rapid Growth in Mid-Interest Loans by Savings Banks
Financial Authorities Worried About Intervention as Loan Volume Increases
Fierce Competition Due to Participation of Internet Banks, Big Tech, and P2P

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

Savings Banks Increasing Mid-Interest Loans, "Worries About Financial Authorities' Regulations"

According to the Korea Federation of Savings Banks on the 26th, there were only 27 mid-interest loan products handled by the savings bank industry in the fourth quarter of 2017. Thanks to the government’s policy to promote mid-interest loans, the number of related products jumped to 47 within a year and increased to 85 by the end of last year. In the first quarter of this year, it is expected that 10 more mid-interest loan products will be supplied, totaling 95.

The loan volume is also rapidly increasing. According to the annual handling status disclosed by the Federation, the cumulative amount of mid-interest unsecured loans from the five major savings banks (SBI, OK, Pepper, Korea Investment, and Welcome) reached 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 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 look favorably upon us due to concerns about 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 on loans from commercial banks and internet-only banks, there is a nervous atmosphere fearing that the backlash might spread to 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 stated, "Loan regulations have been influenced by phenomena like ‘debt investment (bit-tu)’ or ‘pulling all resources (young-kkeul),’ but savings banks have a high usage rate among small business owners," adding, "If the scale of mid-interest loans grows significantly, we may consider reviewing it, but not at this time."

Competition in the Mid-Interest Market Intensifies Due to Internet-Only Banks and Others

The aggressive mid-interest 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 capital increase of 400 billion KRW in the first half of this year, also intends to add mid-interest loan products. Moreover, some top P2P firms have structured over 70% of their loan products as mid-interest loans, making competition increasingly fierce.

Cheap policy financing provided by the government and local governments to mid- and low-credit borrowers after the COVID-19 pandemic also diminishes the attractiveness of savings banks’ mid-interest loan products. This year, the government plans to allocate 494.8 trillion KRW to policy financing, an increase of 16 trillion KRW from last year. Of this, 302 trillion KRW will be used to support funds for small business owners and small to medium-sized enterprises.

Savings bank officials are monitoring the situation carefully, though they do not see an immediate threat. One industry official said, "While mid-interest loan products in other sectors mainly target credit grades 4 and 5, savings banks specialize in grades 6 and 7, so we still have competitiveness," but also noted, "It is true that the atmosphere is becoming threatening as internet banks lead a gradual penetration into the mid- and low-credit borrower loan market."

He added, "Savings banks are also striving to maintain their advantage by launching loan products through more detailed customer segmentation."