Low-income households with poor credit are pressured to borrow from legal loan sharks because they are excluded by banks and other financial institutions.
Major non-bank financial corporations such as savings banks and mutual finance companies have traditionally been more welcoming to these borrowers, but as the government presses all types of financial institutions to tighten lending, even they are reluctant to grant credits.
If struggling households turn to third tier lenders, interest rates for them could reach 20%.
Much of the reason for the change in stance of non-bank financial institutions is that people with good credit rushed to borrow from them as major commercial banks tightened their lending.
Among mutual finance institutions, MG Community Credit Cooperatives suspended home purchase loans, while the Korea National Federation of Credit Unions suspended mortgages and unsecured loans to households last month.
Of 79 savings banks in the country, 18 have reached their household credit limits set by financial regulators. One-year growth in loans to households should be less than 21.1% for savings banks.
âAs we lack the capacity to offer loans, we try to select clients with high credit scores for risk management,â a source from a local savings bank told JoongAng Ilbo.
A bigger problem for households is that loan growth will be even more limited next year.
Financial authorities have already presented plans to curb household debt growth next year by limiting the growth in household loans from savings banks to 10.8% to 14.8%. This goal is about half of this year’s goal.
Another problem is the debt service ratio (DSR), which is the loan repayments divided by the borrower’s income.
For non-bank financial institutions, the DSR will be reduced from 60% to 50% next year.
This means that principal and interest payments on loans will be limited to half of next year’s income for those who borrow from non-bank financial institutions.
The best option left for borrowers with poor credit is private lenders, known in Korean as daebueobja. These legal loan sharks are registered with the Financial Services Commission or local governments, although they are not regulated other than having to keep rates below a certain ceiling.
The interest limit was lowered to 20% in July from 24% previously. As profitability plummeted as a result of the change, loan sharks also tightened their selection process.
According to data from the Korea Research Institute for Financial Inclusion, this group of lenders has been tightening lending in recent years. While 12.6% of loan applications were approved by them in 2018, this rate fell to 11.8% in 2019 and 10.8% in 2020.
“If even second-tier financial institutions close their doors to borrowers with poor credit, they have nowhere to turn,” said Cho Sung-mok, director of the Korea Research Institute for Inclusion financial.
âTotal loan size regulation, like our government, is distorting the market by directing high-credit borrowers to second-tier financial institutions and driving up interest rates by reducing the supply of loans. Said Shin Sung-hwan, professor of finance at Hongik University. . âPolicymakers should take into account the challenges of borrowers with poor credit. ”
BY YEOM JI-HYEON, YOUN SANG-UN, KIM JEE-HEE [firstname.lastname@example.org]