Will Mid-Interest Loans by Card Companies Increase Due to Government Incentives?

Exclusion of 10% Total Balance Limit
Doubt on Effectiveness Due to Declining Profitability

[Asia Economy Reporter Ki Ha-young] Starting this year, as 10% of the balance of mid-interest rate loans is excluded from the total household loan volume regulation when credit card companies provide such loans, attention is focused on whether card companies will increase mid-interest rate lending. Although financial authorities have offered incentives to increase loans to mid- and low-credit borrowers, with rising interest rates and mid-interest rate loans being less profitable compared to long-term card loans (card loans), there are forecasts that significant expansion will be difficult.

According to the industry on the 25th, even if there is no separate mid-interest rate loan product, loans meeting the criteria will be recognized as mid-interest rate loans starting this year. For card companies, loans executed at an interest rate below 11% to borrowers in the lower 50% of credit scores (grade 4 or below) are counted as mid-interest rate loans. Currently, among the seven major card companies (Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, Hana), all except Samsung Card operate mid-interest rate loan products, but now that incentives for mid-interest rate loans can be received even without a product, it is expected that all card companies will implement mid-interest rate lending.

However, there is a cautious atmosphere regarding the expansion of mid-interest rate loans. Most card companies plan to monitor market conditions flexibly as it is still early in the year. Shinhan and Hana Card have stated they plan to expand mid-interest rate loans this year, but this is more from the perspective of strengthening ESG (environment, social, governance) rather than profitability.

From the card companies’ standpoint, mid-interest rate loans are a less profitable business. Considering that the average interest rate for card loans is in the 14% range, the profitability of mid-interest rate loans offered below 11% is lower. Card companies are concerned about worsening profitability this year due to additional reductions in merchant fees and the inclusion of card loans in the debt service ratio (DSR) regulation per borrower. Additionally, with rising interest rates increasing funding costs, it is pointed out that lowering loan interest rates is difficult. This is also why there are concerns that the incentive carrot may not be effective.

An industry official said, "This year, the card industry faces concerns over worsening profitability due to expanded deficits from additional reductions in merchant fees, rising interest rates, and strengthened loan regulations," adding, "Even if incentives are provided, it will not be easy to expand mid-interest rate loans, which are less profitable compared to card loans."