Government pressures online banks to make more low-credit loans

Industry

Published: 04 Dec. 2023, 18:40 Updated: 04 Dec. 2023, 19:33

Government pressures online banks to make more low-credit loans

Regulators are in talks to require that three internet banks — Kakao Bank, KBank, and Toss Bank — extend more loans to customers with low credit scores. [JOONGANG PHOTO]

Financial authorities are looking into measures to make low- and mid-credit range loans — available to those with credit scores below the 50th percentile — from online-only banks more available, amid governmental pressure to help ease citizens' financial burdens.

As high interest rates drag on and low-income finance supplies drop, the move is largely seen as a bid to assign more responsibilities to internet banks.

Authorities are in the late stages of talks regarding the lending practices of the country's top three internet banks — Kakao Bank, Kbank, and Toss Bank. The goal is that a higher proportion of the loans these banks lend out will be to customers with below-average credit, according to sources from the Financial Services Commission (FSC) and Financial Supervisory Service (FSS) and other industry insiders.

The FSC previously announced a plan to expand low and midrange credit loans in May 2021, citing the fact that banks had been making fewer of these loans than expected. At the time, the agency set a goal that 30 percent of the loans made by the top three internet banks be to low- and midrange customers by the end of 2023 and asked those banks to submit annual plans outlining their progress toward that goal.

The proportion of bad credit loans issued by the country's top three internet-only banks rose year over year. [YUN YOUNG]

The three internet banks did increase their issuance of low- and midrange credit loans year over year in 2023. Kakao Bank had achieved a rate of 28.7 percent, Kbank 26.5 percent, and Toss Bank 34.5 percent as of this year's third quarter, according to respective regulatory filings.

Should Kakao Bank, Kbank and Toss Bank reach their goals of 30 percent, 32 percent and 44 percent respectively, they will all have met the goal of 30 percent set by the financial authorities.

The three internet banks, deep down, likely hoped that loan regulations would ease next year. Loan limits for low- and midrange credit loans are lower than they are for high-range creditors. The former also do not contribute much to financial soundness or profitability due to their high default rates.

But financial authorities are looking to expand, rather than ease, the current regulations.

As such, the FSS and FSC are strongly considering increasing the required proportion of new low- to midrange credit loans by to at least 35 percent for the three banks. If the measure is implemented, Kakao Bank and Kbank will have to make more low-credit loans to increase their proportions.

“It is true that we are in the middle of discussions with internet banks on setting new loan proportions [for different credit levels], but negotiations are not completely over,” said a source from the financial authorities.

The discussions come as small-loan finances are in sharp decline. Influenced by rising interest rates, commercial banks are lending less to low-credit customers. Even non-monetary lenders are denying these customers loans, concerned about potential losses.

Savings banks lent out a little more than 1.42 trillion won ($1.1 billion) in midrange credit loans to citizens in this year’s third-quarter, which is a 54.7 percent decrease compared to last year’s 3.14 trillion won, according to the Korea Federation of Savings Banks.

The top 69 lenders, as rated by credit bureau NICE Information Service, had lent out 95 billion won in new loans as of August this year, according to Democratic Party Rep. Oh Gi-hyoung’s data. This only amounts to 30 percent of the 306.6 billion won lent out last year.

Some interpret this potential decision as financial authorities passing the burden of social welfare onto internet banks, who face pressure from enterprise authorization and permission rights, as major lenders lock up their vaults.

Internet banks posit that while a certain level of low and midrange credit loans should be maintained, excessive expansion is not plausible.

“The low- and midrange credit loan proportion goal set in the past was possible because it was during a time of low interest rates,” a finance industry insider said, adding that “the default rate is going up due to the rate hike. If the amount of low- and midrange credit loans is increased, it is highly possible that financial soundness will be damaged.”

The average default rate for internet banks as of late August was 1.3 percent, which is almost 3 times higher than the default rate for all banks, which was 0.43 percent.

Some critics also claim that excessive expansion of low- to midrange credit loans will reduce internet banks’ role in spurring financial innovation, which was their original goal.

“Internet banks were not made to fulfill the role of nonmonetary institutions, but to advance the existing banks industry through innovation,” said Seok Byoung-hoon, an economics professor at Ewha Woman’s University. “Should the burden of low- to midrange credit loans increase too much, the capital put into innovation will decrease just as much, making it highly likely that the original launch effect of internet banks will not be felt,” he added.

BY KIM NAM-JUN [kim.juyeon2@joongang.co.kr]