In the prolonged phase of high interest rates, inflation, and currency fluctuations, the financial sector is effectively acting as a buffer against economic shocks. Beyond supporting vulnerable groups and contributing to policy-driven financial resources, there is increasing emphasis on expanding loans to low- and mid-credit borrowers through internet-only banks, as well as the role of secondary financial institutions like credit cards, insurance, and savings banks in providing financial support to the public. However, indicators of financial health are already showing signs of deterioration, raising concerns about the limits of support capacity.
According to the financial sector on May 29, banks and other financial institutions have launched various win-win programs, including lowering loan interest rates for vulnerable groups, interest refunds, fee reductions, and financial support for small businesses. Notably, banks have recently implemented programs such as Small Business 119 Plus, Business Closure Support Loan, and Sunshine Loan 119 to enhance support for small businesses. These programs focus on long-term installment repayment and interest reductions for borrowers before delinquency, low-interest refinancing loans for those who have closed their businesses, and additional funding for diligent repayers.
The burden of policy-driven financial resources is also increasing. Shinhan Financial became the first in the sector to contribute an additional 100 billion won to the Microfinance Foundation in March, with KB Financial and Woori Financial each adding 100 billion won as well. Internet-only banks are facing pressure to increase their share of loans to low- and mid-credit borrowers following controversies over 'cherry-picking' high-credit customers.
This burden is also spreading to secondary financial institutions. Credit card companies are absorbing the urgent financial needs of low- and mid-credit borrowers and small business owners while managing the dual challenge of delinquency rates in card loans and cash services. According to the Credit Finance Association, the outstanding balance of card loans from nine credit card companies (Samsung, Shinhan, KB Kookmin, Hyundai, Lotte, Hana, Woori, BC, and NH Nonghyup) was 42.983 trillion won at the end of April, slightly down from the record high the previous month but still nearing 43 trillion won. The insurance sector is meeting funding demands through insurance contract loans and household and corporate loans, while savings banks and capital companies, which have a high proportion of low- and mid-credit borrowers, are more sensitive to the impacts of economic downturns.
Warnings have already emerged regarding financial health indicators. As of the end of March, the delinquency rate for won-denominated loans at domestic banks was recorded at 0.56%, the highest level in a decade since the first quarter of 2016. The delinquency rate for savings banks remains around 6%, and risks associated with real estate project financing (PF) are leading to increased provisions. Particularly, savings banks, capital companies, and insurers, which have overlapping exposures to PF and low- and mid-credit loans, are assessed to be exposed to compounded risks.
Within and outside the financial sector, while win-win financing has the positive function of protecting vulnerable borrowers, there are warnings that repeated support for borrowers whose repayment capacity has not recovered could lead to a 'bad debt hot potato' scenario. A financial sector official stated, “While the financial sector is cushioning the shocks of the high-rate economy, excessive support in a situation where delinquency rates and PF risks are simultaneously rising could exacerbate potential bad debts. A sophisticated policy design is needed to balance the protection of vulnerable borrowers and the resolution of bad debts.”
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.