Despite Soaring Card Channel Interest Rates... Card Loan Rates Decline for Half a Year

[Asia Economy Reporter Yu Je-hoon] Despite the worsening funding conditions due to the base interest rate hike, credit card companies' long-term card loan (card loan) interest rates are moving in the opposite direction. Industry insiders expect this reverse trend to continue for the time being, given that loan demand is decreasing and regulatory measures by authorities are expected to persist, despite the negative factor of rising funding costs.

According to the financial sector on the 12th, the average interest rate on card loans based on new transactions by seven major domestic credit card companies (Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, Hana) showed a continuous decline for six consecutive months in the first half of this year: 13.66% in January, 13.54% in February, 13.26% in March, 12.98% in April, 12.97% in May, and 12.92% in June.

This is a regressive trend compared to the market interest rate situation. The Bank of Korea's base interest rate increased by 50 basis points (1bp=0.01%) from 1.25% in January to 1.75% in June, and the interest rates on 3-year card bonds (AA+ rating, Shinhan, Samsung, KB Kookmin) rose sharply from 2.750% at the end of January to 2.878% in February, 3.323% in March, 3.658% in April, 3.800% in May, and 4.462% in June, an increase of 171 basis points over six months.

In other words, while funding costs have risen, lending interest rates have fallen, creating a reverse trend. A credit industry official said, "As interest rates rise, bond yields are also surging, and the spread (price difference) with bank bond yields has widened to over 1 percentage point. Recently, even top-tier companies in the industry are finding it difficult to raise funds compared to before, turning their attention to short-term bonds or long-term commercial paper (CP), which is causing considerable concern."

The reason for this regressive trend in card loan interest rates despite the situation is attributed to "deteriorating demand." In addition to reduced investment and consumption due to the asset market downturn caused by the base rate hike, the government has introduced regulations on the borrower's total debt service ratio (DSR) to control the ballooning card loans from last year. Credit card companies have no choice but to lower card loan interest rates to compensate for the weakened demand. In June, the adjusted interest rates (preferential and special rates) of each card company ranged from 1.25% to 2.36%.

The industry expects this reverse or flat trend to continue for the time being. The main reason is the significant decline in demand itself. According to the Financial Supervisory Service, the outstanding household loans of specialized credit finance companies (card and capital companies) decreased by 200 billion KRW in July compared to the previous month. This marks a decline for two consecutive months following a 300 billion KRW decrease last month. Authorities are also reportedly considering regulations on card loan borrowing for multiple debtors.

An official from the credit card industry said, "In the second half of the year, bonds issued at the beginning of the year with maturities of 3 months and 6 months will mature, and if this situation continues to accumulate, card loan interest rates will find an appropriate level." However, he added, "Given the current situation where demand is considerably depressed, each card company will likely minimize interest rate levels for the time being."