Internet Banks' 'Rapid Rise in Delinquency Rates'...The Pitfall of Loans for Medium and Low Credit Borrowers

Highest Delinquency Rate Since Launch of Three Internet Banks
Rising Interest Rates and Large Proportion of Medium-Low Credit Borrowers Are Causes
Measures Needed to Ensure Soundness

The delinquency rate on unsecured loans from the three internet banks has risen to the highest level since their launch. This is a result of internet banks having to lend to medium- and low-credit borrowers more than traditional banks, coupled with rising interest rates.

According to the office of Yang Kyung-sook, a member of the National Assembly's Planning and Finance Committee from the Democratic Party, as of the end of last month, the delinquency rate on unsecured loans for KakaoBank, K Bank, and Toss Bank was 1.20%. This is a sharp increase of 0.78 percentage points compared to the end of June last year (0.42%). By bank, Toss Bank (1.58%) and K Bank (1.57%) were similar, while KakaoBank had the lowest rate at 0.77%.

The delinquency rate increase among medium- and low-credit borrowers within the total unsecured loans issued by these banks is even steeper. At the end of August, the delinquency rate for medium- and low-credit loans across the three banks was 2.79%, more than three times higher than the 0.84% recorded at the end of June last year. For K Bank, the delinquency rate for medium- and low-credit loans exceeded 4%, Toss Bank was at 3.40%, and KakaoBank was at 1.68%.

Meanwhile, the proportion of unsecured loans to medium- and low-credit borrowers at KakaoBank and K Bank increased further in the second quarter of this year. Toss Bank had the highest proportion of unsecured loans to medium- and low-credit borrowers but saw a decrease compared to the previous quarter.

According to disclosures by the Korea Federation of Banks, the proportion of unsecured loans to medium- and low-credit borrowers (based on outstanding balance) was 27.7% for KakaoBank, 24.0% for K Bank, and 38.5% for Toss Bank. The proportion of unsecured loans to medium- and low-credit borrowers refers to the share of loans to borrowers in the lower 50% credit score bracket according to KCB within the bank’s total household unsecured loan balance.

The financial authorities have mandated annual disclosure of target proportions for loans to medium- and low-credit borrowers. This is intended to ensure that internet banks operate in line with their founding purpose of expanding loan supply to the medium- and low-credit segments, as announced in 2021.

At the '5th Anniversary Discussion on the Enactment of the Internet Specialized Bank Act' held on the 20th at the National Assembly Members' Office Building in Yeouido, Seoul (hosted by Yoo Ui-dong of the People Power Party), Professor Kang Kyung-hoon of Dongguk University’s Business Administration Department, who delivered the keynote speech, stated, "Since 2021, internet banks have set annual year-end target ratios for medium- and low-credit loan balances. However, the current balance-based standard is rigid and managing proportions is difficult due to early repayments, so it is necessary to change to a more flexible standard based on new loan origination amounts that reflect economic conditions."

He added, "Expanding secured loans is important as it provides a stable foundation for handling medium- and low-credit loans through the credit portfolio effect, so active encouragement is necessary."

The third internet bank, Toss Bank, scheduled to launch on the 5th, is drawing attention from the banking sector. Even before its launch, it announced the release of groundbreaking interest rate products, including the highest deposit interest rate in the banking sector at 2% per annum and a minimum loan interest rate in the high 2% range, causing tension not only among other internet banks but also among commercial banks. Especially as financial authorities tighten regulations on household loans, leading to rising loan interest rates and restrictions on loan limits, Toss Bank's announcement of unsecured loans with a maximum limit of 270 million won is expected to attract demand from so-called "loan refugees." The photo shows the Toss Bank headquarters in Gangnam-gu, Seoul, on the 4th. Photo by Hyunmin Kim kimhyun81@