Deposit-Backed Loans Rise at South Korea’s Top Banks as Stock Leverage Persists

'Borrowing to invest' remains strong. Even as uncertainty persists after the Middle East situation, borrowing is rising not only through unsecured credit loans but also through loans backed by deposits. With tough government rules slowing growth in mortgage lending, leveraged stock investing is emerging as a new variable in managing household debt, analysts say.

According to the financial sector on the 24th, the outstanding balance of deposit-backed loans at the five major banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup — totaled 6.3069 trillion won as of the 20th. That is nearly 10% higher than 5.8446 trillion won in March last year and the highest level on record. The balance has continued to rise this year, reaching 6.2290 trillion won in January and 6.2690 trillion won in February.

Deposit-backed loans allow borrowers to take out about 90% to 95% of the value of their deposits, depending on the bank. Interest rates are typically set at the deposit rate plus about 1 to 1.5 percentage points.

The rapid increase is being attributed to the combination of strict lending curbs that have continued since last year and a strong stock market. Some borrowers are using deposit-backed loans — which are excluded from debt service ratio rules that reduce personal loan limits — to fill funding gaps, or to use them like a credit line for stock investing, analysts say.

A commercial bank official said market volatility has increased since the Middle East situation, but many investors appear to see it as a buying opportunity. The official said demand seems to be rising because rates are relatively low and borrowers can respond by canceling the deposit if they cannot repay.

Buying by retail investors has continued to expand despite heightened uncertainty. On the 23rd, foreign investors net sold 3.6984 trillion won on the Korea Exchange’s main board, pulling the index lower, and institutions sold 3.8172 trillion won. Individuals, however, net bought 7.0030 trillion won, the largest net purchase on record.

Margin debt, a key gauge of leveraged investing, also remains near peak levels. Data from the Korea Financial Investment Association show the balance hit 33.7 trillion won on the 5th, then slipped to the 31 trillion to 32 trillion won range, but has held in the 33 trillion won range again since the 16th.

Financial officials say stock-market leverage could become a new factor in household debt management as overall household lending begins to expand again, centered on deposit-backed and unsecured loans. As of the 20th, household loan balances at the five major banks totaled 766.2606 trillion won, up 395.1 billion won from the end of last month (765.8655 trillion won). Over the same period, mortgage loans fell 40.0 billion won to 610.6811 trillion won, suggesting other lending — including deposit-backed loans — drove the increase.

Another financial sector official said demand to pull together funds is growing as investors seek to take advantage of increased volatility. But the official warned that loans taken for short-term investing can shift in size and repayment timing depending on market conditions, and said deposit-backed lending should be watched closely.