Major Banks Automatically Reduce Limits Based on 'Usage Rate'
Additional Interest Rates Applied, Raising 'Double Penalty' Concerns
Banks Say "Unnecessary Costs Arise... For Operational Efficiency"
# Office worker Lee Geun-chang (33) was recently surprised when he renewed his overdraft account (credit line loan) at a commercial bank and saw the reduced credit limit. The limit, which was about 100 million won when the account was opened three years ago, decreased by 5 million won each year, shrinking to 85 million won. Lee said, “I only found out the limit was reduced after seeing the review results without prior notice.” During this period, there were no significant changes in Lee’s income or credit rating. Switching to another bank would mean bearing additional costs such as stamp tax (a tax paid to the government when issuing loan transaction certificates), so he reluctantly maintains his existing overdraft account.
# 40-year-old office worker Jang Seo-jun saw the limit on his overdraft account, opened in 2020 at an internet-only bank in preparation for purchasing a house, drop from 97 million won to 77 million won this year. Although he never used the account as his home purchase was delayed, his income and credit rating remained unchanged.
Banks Reduce Limits by Up to 50% Based on Usage Rate
Major banks are cutting credit limits when extending overdraft accounts, citing low usage rates, which is causing growing dissatisfaction among borrowers. This approach disregards the nature of overdraft accounts as emergency funds and, unlike general personal credit loans, already includes an additional 0.5% margin rate, leading to criticism of a ‘double penalty.’
According to the financial sector on the 20th, most banks use ‘usage rate’ as a criterion for automatic limit reduction. Hana Bank’s flagship product, ‘Hana One Q Credit Loan,’ states that ‘according to the bank’s screening standards, if there is an unused credit limit, a reduction rate may occur based on the limit utilization rate,’ with reductions of up to 50% known to be applied. KB Kookmin Bank automatically reduces the limit by 20% if the average usage rate is below 10% three months before maturity, and restores the limit if the borrower requests. Shinhan and Woori Banks reduce the limit by 10% if the average usage rate is below 10%, and by 20% if below 5%.
Due to Profitability... Some Banks Say “We Don’t Reduce Limits Based Solely on Usage Rate”
Banks reduce overdraft account limits primarily for profitability reasons. The entire overdraft limit is classified as a credit loan. If customers do not use the overdraft, it is still counted as a credit loan but generates no interest income, causing losses for banks. In some cases, banks must also set aside reserves for part of the overdraft. During the financial authorities’ household loan volume regulations, banks responded by reducing overdraft limits first. In September 2021, when regulations were ongoing, major commercial banks uniformly cut overdraft limits to 50 million won, only normalizing limits early the following year.
An official from a bank said, “At the individual branch level, overdraft limits are sometimes reduced to improve loan performance.” Another bank official explained, “From the bank’s perspective, unnecessary costs arise, so this is a measure to improve capital management efficiency.” Banks say they notify borrowers in advance about reductions at renewal and allow them to choose whether to extend.
However, some banks do not reduce limits solely based on usage rate. NH Nonghyup Bank and K Bank explained, “If the borrower’s credit status has not worsened, we do not lower the limit just because the usage rate is low.” An official from another bank said, “Since the loan was originally agreed upon with a higher interest rate, if the borrower’s job, credit, and income are stable, the limit is not adjusted.”
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