[The Hidden Side of Household Loans]② "High Risk"... Savings Banks Refuse to Lend, Causing Problems

Savings Banks Reduce Household Loans by Nearly 1 Trillion Won
Measures to Cut Losses and Manage Delinquency Rates
Only 28 of 79 Institutions Offer Unsecured Loans
Saemaeul Geumgo and Credit Unions Also Decrease Household Loan Volumes

As deposit interest rates rise in the banking sector, the balance of savings and fixed deposits is increasing. The secondary financial sector is also consecutively raising interest rates on fixed deposits. The photo shows Welcome Savings Bank in Jung-gu, Seoul. Photo by Jinhyung Kang aymsdream@

Secondary financial institutions, including savings banks, are reducing household loans, which is problematic. This means that the environment for vulnerable borrowers and those with medium to low credit scores to secure funds from the formal financial sector is deteriorating.

According to the Bank of Korea's Economic Statistics System on the 25th, as of the end of May, household loans from mutual savings banks amounted to 39.9496 trillion KRW. The household credit volume first exceeded 40 trillion KRW at the end of July last year and increased to 40.8146 trillion KRW by the end of October the same year. However, from the end of the year, they raised the loan threshold and have maintained a tightening stance until now.

Currently, the more loans increase, the more losses occur

It has become difficult to find savings banks that provide household loans. Last month, only 28 out of 79 savings banks supplied household credit loans of 300 million KRW or more. Only about one-third of the total engaged in loan operations. The reason savings banks have shut off the tap on household loans is to reduce loss size and manage delinquency rates. Savings banks are about to announce their Q2 performance. Nationwide, 79 savings banks posted a net loss of 52.3 billion KRW in Q1 this year. The industry expects the deficit to narrow slightly but anticipates continued difficulties in Q2 as well.

In this situation, savings banks believe that the more loans increase, the more losses they incur. Above all, the aftermath of the deposit and savings interest rate competition in the financial sector in the second half of last year was significant. Typically, savings banks attract deposits by offering interest rates about 0.5 to 1 percentage point higher than commercial banks. When commercial banks raised deposit and savings interest rates up to 5% due to liquidity tightening, savings banks also increased rates up to 6-7%.

A senior official from a savings bank said, "Commercial banks have relatively more room to raise loan interest rates, so when funding costs rise, they can immediately reflect this in loan rates to avoid losses. However, savings banks are limited by the legal maximum interest rate ceiling of 20%, making it difficult to raise loan rates," adding, "Funding costs have increased, but loan rates cannot be raised, so lending money results in losses."

Delinquency rates also hindered lending. In Q1, the average delinquency rate of 79 savings banks nationwide was 5.1%. This is the first time since the end of 2016 (5.8%) that the delinquency rate exceeded 5%. An increase in delinquency rates leads to higher interest rates. However, due to the legal maximum interest rate, raising loan rates is impossible.

Credit scores below 600 increasingly excluded from formal financial sector

It is becoming increasingly impossible for low-credit borrowers to get loans from savings banks. Only 15 out of 79 savings banks lent money to borrowers with credit scores below 600. Until December last year, when savings banks began shutting down new and refinancing loans, there were 18 such banks, but the lending gap has since narrowed further. The official said, "Simply put, if loans were previously given up to credit grade 8, now they are only given up to grade 5," adding, "As borrowing becomes more difficult, low-credit borrowers are inevitably pushed into the illegal private lending market."

Meanwhile, Saemaeul Geumgo and credit unions have also seen a clear reduction in household loan volumes. According to the Bank of Korea, Saemaeul Geumgo's household loan balance increased to 67.6672 trillion KRW in November last year but fell to 64.2969 trillion KRW as of May this year. Credit unions also decreased from 37.9956 trillion KRW to 36.3168 trillion KRW during the same period.