[Issue Analysis] "Loan inquiries have increased... but we can't lend any more"

Banks Lower Interest Rates and Raise Limits
But Unable to Lend More Despite Willingness

[Asia Economy Reporter Sim Nayoung] Commercial banks have been continuously lowering the loan threshold since the beginning of the year. Last month, KB Kookmin Bank, Hana Bank, and Shinhan Bank increased the limit on overdraft accounts from the previous 50 million KRW to 100 million to 150 million KRW. NH Nonghyup and Woori Bank raised their limits to a maximum of 250 million KRW and 300 million KRW, respectively. Each bank has also lowered mortgage and jeonse deposit loan interest rates by about 0.5 percentage points compared to before. Internet-only banks KakaoBank and K Bank have joined this competition by reducing interest rates on mid-credit loans and jeonse deposit loans.

Banks Lower Interest Rates and Raise Limits, Leading to a Surge in Additional Loan Inquiries
Long Lines of Customers Holding Waiting Tickets at Quick Service Counters
DSR Regulations Cause Frequent Rejections After Screening, Leaving Customers Disappointed

These days, employees at the 'Quick Service' counters in bank branches are barely catching their breath. This is because people are lining up holding waiting tickets, asking, "I saw the article; can I really get an additional loan?" An employee at Bank A said, "Nine out of ten customers are inquiring about additional loans," adding, "After hearing that banks have increased credit loan and mortgage loan limits, including overdraft accounts, and lowered interest rates, customers started flocking in."

An employee at Bank B said, "In reality, when we receive loan inquiries and conduct screenings, many customers do not have the capacity for additional loans," and added, "When we say there is nothing more we can do, customers feel disappointed." 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.

"In the past, professionals like lawyers and doctors could easily get loans just by showing their licenses because of their high expected income, and even regular employees were often lent amounts far exceeding 40% based on their upward expected income, but now loans are difficult due to this barrier," explained an employee at Bank C. Despite the five major commercial banks lowering hurdles for household loans, the decline in household loans is accelerating for this reason. 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 this year to 1.7522 trillion KRW in February and 2.7436 trillion KRW in March.

Interest Rate Hikes, Uncertain Real Estate Market, and Lack of Investment Destinations
Even if Loan Regulations Are Eased, Rapid Increase Is Unlikely

[Image source=Yonhap News]

In the financial sector, due to interest rate hikes, an uncertain real estate market, and a lack of investment destinations, it is predicted that even if the new government launching in May eases various bank loan regulations, household loans will not surge as they did before. As of February this year, banks are applying interest rates in the 4% range even to high-credit borrowers, and mortgage loan rates have risen to 6%, yet the market expects additional base rate hikes within this year.

According to the 'Proportion of Household Loans by Deposit Bank Interest Rate Level' (based on new loans) in the Bank of Korea's economic statistics system, as of February, the proportion of borrowers with loans between 4% and 5% was 31.5%, the highest in 8 years and 5 months since September 2013 (31.9%). The proportion of low-interest borrowers has shrunk. In February last year, the proportion of borrowers with loans below 3% was overwhelmingly 81.2%, but it dropped to 15.3% in just one year.

People who took out unsecured loans last year to invest in virtual assets and stocks have also turned cautious as market conditions worsened. A financial sector official said, "If real estate market policies change and the housing market does not boom, loosening loan limits will not be very effective."

As household loans decrease, banks concerned about profitability are turning their attention to corporate loans, which are not regulated. According to the Bank of Korea, the increase in corporate loans by banks between January and February this year was 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 rates. Based on new loans, corporate loan interest rates in February were 3.44%, while household loan interest rates were 3.93%.