[Interest Rate Hike] 4 out of 10 Savings Bank Borrowers Face High Interest Rates... How to Handle the Interest Bomb?

43.7% of Savings Bank Borrowers Have 16-20% Interest Rates
7 Banks Have Over 90% High-Interest Loans
Small Loans, Delinquents, and Multiple Debtors Also Pose Risks"
"Interest Rate Hike Hits Secondary Financial Borrowers Harder

[Image source=Yonhap News]

[Asia Economy Reporter Song Seungseop] As the Bank of Korea raised the base interest rate by 0.25 percentage points, the burden on borrowers in the secondary financial sector is also expected to increase significantly. This is because 4 out of 10 borrowers who took out unsecured loans from savings banks are high-interest borrowers. There are warnings that this could act as a trigger that increases the risk of insolvency, as many low-credit borrowers, self-employed individuals, and multiple debtors are concentrated in this sector.

According to the Korea Federation of Savings Banks on the 14th, 43.7% of savings bank unsecured loan borrowers last month borrowed money at high interest rates of 16-20%. Breaking it down in detail, the proportion of borrowers with loans at 18-20% (27.0%) was larger than those with loans at 16-18% (16.6%). There were also seven savings banks (Korea Investment, SangSangIn Plus, Cheongju, Inseong, MS, Samho, Yungchang) where the proportion of high-interest loans exceeded 90%.

Loan interest rates are calculated by adding the base interest rate set by the Bank of Korea and the individual financial institution’s margin rate, then subtracting preferential rates. Vulnerable borrowers who turn to the secondary financial sector usually have margin rates set at the highest possible level and practically no preferential rates. Due to the impact of the base rate hike, many of them have to borrow money at the maximum interest rate (20%).

Insolvent Borrowers Turning to Savings Banks... "Direct Hit from Base Rate Hike"

Low-credit and low-income borrowers who cannot balance their finances within the maximum interest rate also face the risk of a credit crunch. Savings banks are currently under pressure from the government and financial authorities to manage household debt, so there is little reason for them to take risks by lending to financially vulnerable groups. With various financial forbearance policies continuing due to COVID-19, risk management has become more difficult, and industry insiders agree that the loan screening threshold for vulnerable groups will rise.

The risk per borrower at savings banks is also problematic. Currently, 6 out of 10 savings bank unsecured loan borrowers are multiple debtors who owe money to three or more financial institutions. Among them, the default rate for multiple debtors using small loans (under 3 million won) is 10.3%, higher than the overall rate of 6.8%. There are concerns that if loan interest rates from multiple financial institutions rise simultaneously, low-income and low-credit borrowers who are already vulnerable could collapse.

Professor Kim Daejong of the Department of Business Administration at Sejong University said, “Even if the base interest rate rises equally, the impact will inevitably be greater on financially vulnerable groups in the secondary financial sector, such as small business owners and the self-employed.” He pointed out, “Since government loan regulations restrict business activities, there is a high possibility that vulnerable groups will be excluded or charged slightly higher margin rates to pursue more profits.” He added, “There is no problem with the Monetary Policy Committee raising the base interest rate, but the problem lies in the many market-distorting policies from the government.”