Banks target borrowers with middling credit

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Banks target borrowers with middling credit


Among Korean lenders, competition is heating up to attract a specific segment of borrowers: those with middling credit.

These potential customers are often white-collar office workers with a credit rating between 4 and 6 on Korea’s 1-to-10 scale, with 1 being the best score. As of last year, the number of people in this middle range amounted to over 18.8 million, roughly 42 percent of the population.

Financial institutions are hoping to attract this middling segment with loan rates in the range of 6 to 19 percent. The usual amount borrowed is between 30 million and 50 million won ($26,700 to $44,500), and in some cases as high as 100 million won. In most cases, they are unsecured loans.

In the past, savings banks, which in Korea are more like consumer finance companies, dominated this midrate loan market. Borrowers would turn to these second-tier financial institutions if they could not secure a low-interest loan from a commercial bank or take on a risky high-interest loan from a private lender.

Recently, however, internet banks with the resources to lend to more borrowers have stepped in to fill the gap. In response, commercial banks, too, have been expanding their business to include midrate loans.

Market interest has especially grown since President Moon Jae-in promised to increase the number of loan products in the 10 percent range.

But the competition first picked up in early April, well before President Moon was elected. It was then that Korea’s first internet bank, K bank, opened for business. Its biggest advantage - not having to run any physical branches - has allowed it to save costs and provide to a wider range of borrowers, especially those with middling credit.

The bank has even given single-digit-rate loans to those with credit ratings as low as 7. A typical savings bank would charge double-digit rates under the same circumstances.

With its main internet competitor, Kakao Bank, scheduled to open later this month, K bank is planning to ramp up marketing of its midrate loan products. Because of the huge popularity it drew from the start, the bank’s loan-to-deposit ratio has already exceeded 90 percent. To secure more funding, K bank plans to raise 250 billion won by issuing additional shares.

At commercial and savings banks, the midrange product that will likely compete with K bank and Kakao Bank is the so-called Saitdol loan, which in Korean literally translates to “stone in the middle.” It targets borrowers with a credit score of 4 to 6. As of May 23, 647.2 billion won has been borrowed from Saitdol loans, over 60 percent of which was from commercial banks, since it was introduced last year.

The program has received support from the government because it eases the financial burden on those who otherwise might have turned to high-interest loans.

The Financial Services Commission, Korea’s financial regulator, plans to increase the maximum limit allowed for midrate loans at banks from 1 trillion won to 2 trillion won in the second half this year.

The government will also expand the financial institutions offering such loans to include cooperatives like Nonghyup and the National Credit Union Federation of Korea. These companies will have access to a maximum pool of 200 billion won. Although a small amount compared to commercial or savings banks, these institutions have the advantage of larger access to agricultural and fishing villages in rural areas.

“Most of the elderly living in farming neighborhoods have trouble borrowing from banks because of low credit scores,” said an official at the National Credit Union Federation. “The Saitdol loans will be a game changer in the midrate loan market.”

The savings banks that have dominated the market aren’t sitting by. They’re trying to grab potential customers by lowering interest rates on their products.

SBI Savings Bank recently shaved 1 percentage point on its midrate loans. It is also planning to introduce a loan program with rates below 10 percent.

“If the midrate loan market expands, fueled by government policy and the opening of internet banks, we can expect new demand upward of 28 trillion won from customers with middling credit,” said Kim In, an analyst at Eugene Investment & Securities.

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