Global high interest rates are putting pressure on vulnerable households in South Korea. As U.S. Treasury yields soar, domestic bond yields are also remaining high. Concerns are growing that if financial institutions pass on their increased funding costs to already burdened borrowers, it could lead to higher interest burdens and increased risk of default.
According to the financial sector, the yield on the U.S. 10-year Treasury note reached 5.338% during trading on October 1, marking a 24-year high. It closed at 5.243%, but had risen by about 0.9 percentage points in the third quarter alone.
Domestic financial institutions are also facing high funding costs. The Korea Financial Investment Association's Bond Information Center reported that the average yield on AA+ rated three-year bonds was 4.680% as of September 28, up approximately 1.8 percentage points from 2.881% at the end of September last year.
Unlike banks, credit card companies do not have deposit functions, making them highly reliant on market-based funding such as bonds. When bond yields rise, the costs of obtaining new funds and refinancing maturing bonds increase, which can pressure card company profitability and contribute to rising loan rates.
Vulnerable borrowers are already facing high card loan rates. Data from the Korea Credit Finance Association shows that the average interest rate on new card loans from eight major credit card companies was 14.10% in August, slightly down from 14.15% the previous month but still maintaining a rate above 14% for two consecutive months. For borrowers with credit scores below 700, the average rate was even higher at 17.20%.
Card loan rates vary based on borrower creditworthiness and product structure, so increases in funding costs may not be immediately reflected in loan rates. However, if market interest rates remain high, the cumulative burden of funding costs could lead to upward pressure on loan rates.
Signs of declining repayment capacity are also emerging. The balance of card loan refinancing among nine credit card companies rose to 1.6953 trillion won at the end of August, a 22.7% increase from the end of last year. This indicates that borrowers are increasingly taking out new loans from the same card company to repay existing card loans they find difficult to manage.
The balance of revolving credit also increased from 6.7201 trillion won to 6.9994 trillion won during the same period, a 4.2% rise. As borrowers delay repayment or use new loans to pay off existing debts, the pressure for further interest rate increases adds to the situation.
The impact of rising rates can be felt more quickly by vulnerable borrowers. According to the Bank of Korea's recent report on financial stability, while the delinquency rate for household and corporate bank loans reacted most significantly about 15 months after a rate hike, the delinquency rates for vulnerable household borrowers and small business loans showed the most significant response around nine months later.
As of the end of the second quarter this year, the delinquency rate for vulnerable household borrowers was 10.39%, more than ten times the overall household loan delinquency rate of 0.98%. If interest burdens increase for these already high-risk borrowers, their repayment conditions could worsen.
The decline in borrowers' repayment capacity also poses a risk to the financial health of institutions. The Bank of Korea noted that more than half of the increase in card loans this year has gone to low-credit borrowers in the bottom 20% of credit scores. Credit card companies now face the challenge of managing rising funding costs alongside the risk of defaults from vulnerable borrowers.
A financial sector official stated, "If the repayment capacity of vulnerable borrowers, who are already facing high interest rates, declines further, it could lead to increased delinquency rates and deteriorating financial health for institutions. It is essential to closely monitor market interest rate trends for the time being."
According to the financial sector, the yield on the U.S. 10-year Treasury note reached 5.338% during trading on October 1, marking a 24-year high. It closed at 5.243%, but had risen by about 0.9 percentage points in the third quarter alone.
Domestic financial institutions are also facing high funding costs. The Korea Financial Investment Association's Bond Information Center reported that the average yield on AA+ rated three-year bonds was 4.680% as of September 28, up approximately 1.8 percentage points from 2.881% at the end of September last year.
Unlike banks, credit card companies do not have deposit functions, making them highly reliant on market-based funding such as bonds. When bond yields rise, the costs of obtaining new funds and refinancing maturing bonds increase, which can pressure card company profitability and contribute to rising loan rates.
Vulnerable borrowers are already facing high card loan rates. Data from the Korea Credit Finance Association shows that the average interest rate on new card loans from eight major credit card companies was 14.10% in August, slightly down from 14.15% the previous month but still maintaining a rate above 14% for two consecutive months. For borrowers with credit scores below 700, the average rate was even higher at 17.20%.
Card loan rates vary based on borrower creditworthiness and product structure, so increases in funding costs may not be immediately reflected in loan rates. However, if market interest rates remain high, the cumulative burden of funding costs could lead to upward pressure on loan rates.
Signs of declining repayment capacity are also emerging. The balance of card loan refinancing among nine credit card companies rose to 1.6953 trillion won at the end of August, a 22.7% increase from the end of last year. This indicates that borrowers are increasingly taking out new loans from the same card company to repay existing card loans they find difficult to manage.
The balance of revolving credit also increased from 6.7201 trillion won to 6.9994 trillion won during the same period, a 4.2% rise. As borrowers delay repayment or use new loans to pay off existing debts, the pressure for further interest rate increases adds to the situation.
The impact of rising rates can be felt more quickly by vulnerable borrowers. According to the Bank of Korea's recent report on financial stability, while the delinquency rate for household and corporate bank loans reacted most significantly about 15 months after a rate hike, the delinquency rates for vulnerable household borrowers and small business loans showed the most significant response around nine months later.
As of the end of the second quarter this year, the delinquency rate for vulnerable household borrowers was 10.39%, more than ten times the overall household loan delinquency rate of 0.98%. If interest burdens increase for these already high-risk borrowers, their repayment conditions could worsen.
The decline in borrowers' repayment capacity also poses a risk to the financial health of institutions. The Bank of Korea noted that more than half of the increase in card loans this year has gone to low-credit borrowers in the bottom 20% of credit scores. Credit card companies now face the challenge of managing rising funding costs alongside the risk of defaults from vulnerable borrowers.
A financial sector official stated, "If the repayment capacity of vulnerable borrowers, who are already facing high interest rates, declines further, it could lead to increased delinquency rates and deteriorating financial health for institutions. It is essential to closely monitor market interest rate trends for the time being."
* This article has been translated by AI.
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