[1mm Financial Talk] Banks That Want to Lend More Money but Can't, Why?

Long Lines of Customers Holding Waiting Tickets at Bank's Fast Service Counter
Additional Loan Inquiries Surge Following News of Interest Rate Cuts and Limit Increases
DSR Barrier High, Rejections Common After Screening, Customers Left Frustrated

[Asia Economy Reporter Sim Nayoung] "I came after reading the article, but can I really get an additional loan?" These days, employees at the 'Quick Service' counters in bank branches have no time to catch their breath. This is because people holding waiting tickets are lined up. An employee at Bank A said, "Nine out of ten customers inquire about additional loans," adding, "After hearing that banks have increased the limits on credit loans including overdraft accounts and mortgage loans and lowered interest rates, customers started flocking in."

Loan Thresholds Lowered but Blocked by Regulations... Whether Limits Are Relaxed or Not, It’s the Same

Commercial banks have been continuously lowering loan thresholds since the beginning of the year. KB Kookmin Bank, Hana Bank, and Shinhan Bank have increased the overdraft account limits from the previous 50 million KRW to 150 million KRW. NH Nonghyup and Woori Bank have raised their limits up to 250 million KRW and 300 million KRW respectively. Each bank has also lowered mortgage loan and jeonse deposit loan interest rates by about 0.5 percentage points compared to before. Internet-only banks like KakaoBank and K Bank have joined this competition by reducing interest rates on mid-credit loans and jeonse deposit loans.

An employee at Bank B said, "When we actually receive loan inquiries and conduct assessments, many cases show no additional loan capacity," adding, "Customers feel disappointed when we say there is nothing more we can do." The reason banks want to lend money but cannot is due to the Debt Service Ratio (DSR) regulation. This ratio divides the borrower's annual principal and interest repayment amount by their annual income, and currently, if the total loan amount exceeds 200 million KRW, the bank loan principal and interest cannot exceed 40% of the annual income. Most customers who want to borrow more money are blocked by this limit and cannot borrow further."

[Image source=Yonhap News]

The Decline in Household Loans Widens
Interest Rate Hikes, Uncertain Real Estate Market, and Lack of Investment Destinations Also Contribute

"In the past, professionals like lawyers and doctors had high expected incomes, so just showing their licenses made it easy to get loans, and even regular office workers were often lent much more than 40% based on their upward expected incomes. But now, loans are difficult because of this barrier," explained an employee at Bank C. This is why, even after the five major commercial banks lowered the hurdles for household loans, the decline in household loans is accelerating. The decrease in household loan balances at KB Kookmin, Shinhan, Woori, Hana, and NH Nonghyup banks has grown from 1.3634 trillion KRW in January to 1.7522 trillion KRW in February and 2.7436 trillion KRW in March this year.

In the financial sector, it is predicted that even if the new government launching in May lifts various bank loan regulations, household loans will not surge as rapidly as before due to interest rate hikes, an uncertain real estate market, and lack of investment destinations. As of February this year, banks are applying interest rates in the 4% range even to high-credit borrowers, and mortgage loan interest rates have risen to 6%, yet the market expects further base rate hikes within the year. People who took out credit loans last year to invest in virtual assets and stocks have turned cautious as market conditions worsened. A financial sector official said, "If real estate market policies do not change to stimulate the housing market, relaxing loan limits will not be very effective."

As household loans decrease, banks worried about profitability are turning their attention to corporate loans, which are not regulated. According to the Bank of Korea, the increase in corporate loans in the banking sector between January and February this year reached 19.6 trillion KRW, the highest since statistics began in 2007. Since August last year, corporate loan interest rates have even become lower than household loan interest rates. Based on new loan amounts, corporate loan interest rates in February were 3.44%, while household loan interest rates were 3.93%.