Relief loans cause worries for banks

Financial Services Commission Chairman Yim Jong-yong, center, speaks at a meeting with CEOs of local banks held at the Bankers’ Club in downtown Seoul, Friday. Yim said ‘Relief Loans’ have helped restructure household debt. / Yonhap

By Yoon Ja-young

The “Relief Loans” led by the government are worrying banks as they could cause negative side effects, including the erosion of their profitability, analysts said Friday.

Banks finished the sales of the second batch of the new amortized, low-fixed rate mortgages Friday, the deadline set for the next round of the 20-trillion-won in relief loans, following the first 20 trillion won. Only half was used in the second batch.

Policymakers have apparently been buoyed by the strong demand for the new loans.

In a meeting with the heads of banks, Financial Services Commission (FSC) Chairman Yim Jong-yong said the relief loans changed the banks’ loan structure in a positive way.

“More than anything else, it changed the customs ― the debtors pay back loans from the beginning. It also helps avoiding financial volatility,” he said.

“We will continue restructuring household debt, which is the biggest risk to the economy and the financial market,” he added.

The government introduced the so-called relief loans to allow floating-rate mortgage carriers to transfer to amortized, fixed-rates of around 2.6 percent, which is more than 1 percentage point lower than what most of the debtors were paying.

Though the interest rate is at a historically low level, there has been concern that it might turn upward at any moment following a key rate hike in the United States. Those who had housing mortgages thus actively switched to the new loans.

As the 20 trillion won fund for the relief loans was depleted after only four days since their launch, the government had banks distribute a second and final round of the loans, totaling another 20 trillion won.

The government thinks it will not only lessen the interest burden on households, but also help decrease household debt as the relief loans require paying back not only interest but also the principal at the same time.

With other mortgages, debtors often pay only interest and delay the payment of the principal until a few years later.

However, analysts express concerns about the possibility of the new amortized mortgages going sour as borrowers have to pay principal and interest at the same time.

They also point out that the relief loans are like supporting a select few people with taxpayers’ money.

“The fund for the relief loans is raised by the Korea Housing-Finance Corp. a state-owned company. In case the company sustains losses due to rising interest rates or defaults of the loans, the taxpayers will be making up for it,” said an analyst who declined to be named.

Hwang Seok-kyu, an analyst at Kyobo Securities, said the relief loans hurt the banks.

“They will sacrifice part of the banks’ profitability. It will inevitably decrease the interest income for banks as they will be providing mortgages at around a 2.5 percent rate from the previous rate of around 3.5 percent.”

He said banks will see around a 360 billion won interest income decrease annually because of the relief loans.

There are also complaints over equity.

Lee Dong-gull, former president of Korea Institute of Finance, pointed out that the relief loans are like a “pie in the sky” for low-income households who are barely managing to pay back interest, let alone principal.

“While switching to the relief loans will lessen the interest burden, they don’t have the capability to pay back the principal now. The loan will thus benefit mid- to high-income households, who have little risk of defaulting. The loan is thus ineffective in solving the household debt problem.”

He also points out that the mortgages at banks, which are eligible for the relief loans, are the most unlikely to default. Those who got mortgages from non-bank lenders, such as mutual savings banks or mutual financing, are not eligible for the relief loans, though they are currently subject to higher interest rates compared to those who got mortgages at banks. “The government policy should focus on restructuring the household debt that is more vulnerable, but it is doing the thing the other way around,” he said.