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Banks’ credit loans see sudden drop amid authorities’ warnings

Major South Korean banks are on the path of tightening their extension of personal unsecured loans, apparently responding to the financial authorities continued efforts to curb “excessive lending.”

Outstanding personal loans extended by five major lenders here -- KB Kookmin, Shinhan, KEB Hana, Woori and NH NongHyup -- fell to 126.9 trillion won as of Thursday, down 243.6 billion won ($209.3 million) from the previous day, data showed Sunday.

This marked a sharp turn from the extended gains observed throughout this month. The balance added some 1.1 trillion won from Sept. 11 to 16, rising to 126.33 trillion won from 125.19 trillion won.

Fueling the borrowing demand in mid-September was the widely spread speculation that financial authorities would soon tighten loan regulations in a move to safeguard the nation’s fiscal soundness.

But with tangible actions recently taking shape coupled with the banks decision to correspondingly tighten their grip over lending, the personal loan balance entered a downturn.

One of the game changers was the watchdog Financial Supervisory Service’s gesture on Sept. 14 to tighten its supervision, by requesting key lenders to submit plans that could effectively curb demand for personal credit loans by Sept. 25.

“It appears that the current ceiling for personal credit loans is excessively high, compared to the borrowers’ income level,” a senior FSS official was quoted as saying in a meeting with banks’ vice presidents in charge of credit lending.

A plausible response would be to eliminate the conventional prime rate for credit loans and to cut the exceptionally high loan ceiling granted to designated professional jobs such as medical doctors and lawyers, industry officials said.

As the government extends its efforts to cool down the heated housing market at all costs, the mortgage rate conditions are also expected to have an impact in the upcoming weeks, following the Chuseok holiday. Onlookers also project the banks to lower the credit limit for those in the “upper-income tiers,” including civil workers and employees of large companies.

Banks have often made deals with such institutions or firms to increase their employees’ credit limits and extend loans with relatively low interest.

Asia’s fourth-largest economy is apparently facing a “loan crisis” under the COVID-19 pandemic. Experts stressed this year would be a moment of “calm before the storm,” and that financial authorities would have to be on guard for delinquency and default that would materialize next year.

Alongside surge in credit loans, outstanding household loans extended by major lenders in August rose 11.7 trillion won on-month to 948.2 trillion won, according to the Bank of Korea. This marks the largest volume extended since 2004.

The problem lies in the government’s push for local lenders to adopt various loan forbearance programs for citizens and business owners hit by the coronavirus, without considering the risks of delinquency and default, according to experts.

“An economic slowdown has led to deteriorating fiscal soundness in credit and small-and-medium sized enterprise loans, (and the situation is likely to worsen) due to deferred payments and interests,” an analyst at Korea Ratings said.

The BOK’s latest decision to slash its benchmark interest rate to a record-low of 0.5 percent has sent waves across the banking sector here to adopt ultra-low interest rates. This have led to retail investors borrowing bank loans to invest in stocks and properties.

The BOK’s decision was made to combat economic woes stemming from the coronavirus pandemic.

By Jung Min-kyung (