Interest rates, virus crisis lead to fevered borrowing

Economy

Published: 14 Sep. 2020, 20:04

Interest rates, virus crisis lead to fevered borrowing

Koreans are borrowing money more than ever.

Ultra-low interest rates and government curbs on the real estate market are pushing a lot of people into stock investments — with borrowed money. On the more desperate pole, some people are borrowing to survive the prolonged Covid-19 crisis.

As of Sept. 10, the total amount of outstanding unsecured loans held by Korea's five commercial banks — KB Kookmin, Shinhan, Hana, Woori and NH Nonghyup — stood at 125.4 trillion won ($106 billion) — 1.1 trillion won more than at the end of last month, a 0.8 percent jump in just eight working days.

Interest rates on unsecured loans from commercial banks are between 1.85 and 3.75 percent.

If such a trend continues, the amount of new unsecured loans issued by commercial banks in September will exceed that of last month, when the figure hit an all-time monthly high of 4.07 trillion won.

Kakao Bank, one of Korea's two purely online banks, said the amount of unsecured loans on its books increased by 600 billion won in July and August, bringing the total amount of outstanding unsecured loans to 14.7 trillion won by the end of August.

Data showed that many people were borrowing from credit card companies.

Cash advances and credit card loans totaled 53 trillion won in the first half of 2020, a 1.4 percent jump year-on-year, the Financial Supervisory Service report showed Monday. Credit card loans in particular increased by 10.5 percent year-on-year.

This contrasts somewhat with a fall in credit and debit card transactions in the first half of the year. Payments on plastic totaled 424.7 trillion won in the first half, 0.3 percent less than the same period a year earlier.

The Covid-19 crisis is forcing some people to borrow money in such difficult times.

Others see debt as a way to make a profit. As the government cracked down on real estate speculation, people are looking for alternatives to invest their money, and new initial public offerings (IPOs) by SK Biopharmaceuticals and Kakao Games fanned their interest.

Unsecured loans from the five commercial banks increased by 1.8 trillion won on Sept. 1 alone — the day subscriptions for Kakao Games' IPO started.

More than 58 trillion won was put on deposit by investors hoping to get in on that IPO, a record for a Korean IPO.

As the amount of debt rises to dangerously high levels, financial authorities said they will look into whether there were inappropriate approvals of loans.

“I will look into whether the unprecedented spike in unsecured loans derived from overheated competition between banks to issue more loans," said Sohn Byung-doo, vice chairman of the Financial Services Commission, on Sept. 8.

Regulators are expected to soon crack down on unsecured loan approvals. As this type of loan doesn’t have collateral, the lender takes big risks in making them.

The regulators will also look into whether unsecured loans flowed into the property market.

BY AHN HYO-SUNG, JIN EUN-SOO [jin.eunsoo@joongang.co.kr]