More borrowers forced to turned to non-banking lenders
Household loans by non-banking financial institutions, including savings banks and credit card companies, have surpassed 535 trillion won ($459 billion). The figure marked an increase of nearly 8 percent from a year ago. It results from banks' tightening of household loans, driving borrowers with low credit ratings toward non-banking lenders. As the interest rate of non-banking loans hovers above 10 percent a year, however, interest burdens on financially vulnerable classes are swelling.
If things go wrong, the government's financial squeeze may end up only increasing loan defaults without reducing household debt. According to financial sources, the country's five largest commercial banks have decided to limit the credit line below borrowers' annual salaries. The decision comes after the monetary authorities pressed banks to reduce loan ceilings for individual borrowers.
Last month, banks' interest rates on new household loans stood at 2.99 percent per year, but the annual interest demanded by non-banking lenders amounted to 13.5 percent. People excluded from bank loans must pay nearly five times higher interest. It will not be easy for low-credit borrowers, including self-employed people hit hard by the COVID-19 pandemic, to endure such high interest rates. Defaults and personal bankruptcies will surge.
Low-income people mainly borrow money for living expenses. Two-thirds of people who borrow from non-bank lenders are multiple debtors who have to borrow from Peter to pay Paul. The monetary policymakers have already told the non-banking lenders to link credit lines to yearly income. If the cash-strapped people cannot borrow even from non-banking lenders, they have only one option remaining ― loan sharks.
"I will make and implement policies while taking full care not to cause difficulties for people who need loans most direly," Koh Seung-beom, who has been nominated to lead the Financial Services Commission, said at the National Assembly last week. However, banks have sought to control the total amount of loans pressed by financial regulators. So instead of paying lip service, the government should put forth specific support measures to prevent poor borrowers from being turned away at bank windows.
Household loans by non-banking financial institutions, including savings banks and credit card companies, have surpassed 535 trillion won ($459 billion). The figure marked an increase of nearly 8 percent from a year ago. It results from banks' tightening of household loans, driving borrowers with low credit ratings toward non-banking lenders. As the interest rate of non-banking loans hovers above 10 percent a year, however, interest burdens on financially vulnerable classes are swelling.
If things go wrong, the government's financial squeeze may end up only increasing loan defaults without reducing household debt. According to financial sources, the country's five largest commercial banks have decided to limit the credit line below borrowers' annual salaries. The decision comes after the monetary authorities pressed banks to reduce loan ceilings for individual borrowers.
Last month, banks' interest rates on new household loans stood at 2.99 percent per year, but the annual interest demanded by non-banking lenders amounted to 13.5 percent. People excluded from bank loans must pay nearly five times higher interest. It will not be easy for low-credit borrowers, including self-employed people hit hard by the COVID-19 pandemic, to endure such high interest rates. Defaults and personal bankruptcies will surge.
Low-income people mainly borrow money for living expenses. Two-thirds of people who borrow from non-bank lenders are multiple debtors who have to borrow from Peter to pay Paul. The monetary policymakers have already told the non-banking lenders to link credit lines to yearly income. If the cash-strapped people cannot borrow even from non-banking lenders, they have only one option remaining ― loan sharks.
"I will make and implement policies while taking full care not to cause difficulties for people who need loans most direly," Koh Seung-beom, who has been nominated to lead the Financial Services Commission, said at the National Assembly last week. However, banks have sought to control the total amount of loans pressed by financial regulators. So instead of paying lip service, the government should put forth specific support measures to prevent poor borrowers from being turned away at bank windows.
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