Internet loan interest rate… Higher than credit loans | Korean economy

Photo = News 1 An ‘unusual phenomenon’ has been occurring in the internet banking industry for over three months where the interest rates on home mortgage loans with clear collateral are higher than the interest rates on credit loans for people with low to medium credit who are at high risk of losing their loans.

Usually, the interest rate for home loans is set lower than for credit loans, which may go bad at any time, as the value of the collateral is stable. However, the ‘interest rate inversion’ phenomenon that overturned financial common sense occurred in the first financial sector. This is the result of regulations requiring at least 30% of all credit loans to be credit loans to people with low to medium credit and policies to suppress household loans, which simultaneously constrained internet banks.

According to Kakao Bank, the number one internet banking company (based on total assets) on the 12th, the bank set the interest rate for periodic mortgage loans, which fixes the interest rate for five years, at 4.103-6.372% per annum. On the same day, the interest rate for ‘Medium Credit Loan’, a credit loan product sold to people with low to medium credit with credit scores in the bottom 50%, was set at 3.139~10.874% per year. The minimum interest rate for home loans is about 1 percentage point higher than the minimum interest rate for credit loans for people with low to medium credit.

The interest rate inversion phenomenon between the safest collateral loans and the riskiest credit loans occurred in August of this year and has continued for more than three months. Until the first half of this year, Kakao Bank’s home loan interest rate had always been about 0.5 percentage points lower than that of mid-credit loans, but this is because the home loan interest rate rose in the second half of the year following the government’s policy of suppressing household loans.

On the other hand, interest rates on credit loans from internet banks to people with low to medium credit have decreased. Starting from the 5th of this month, Kakao Bank launched a special sale that lowered the interest rate on mid-credit loans by 0.3% points. This is because, in accordance with government regulations, internet banks must maintain the balance of credit loans for people with medium and low credit at more than 30% of total credit loans.

An industry insider said, “The ‘two-way’ regulation that requires expanding credit loans to those with low and medium credit while suppressing household lending is damaging both the growth and soundness of internet banks.”

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In the banking world, domestic housing mortgage loans are called ‘the safest loans.’ Since the bank lends with a loan-to-value ratio (LTV) of 70%, there is a small possibility that the bank will not be able to recover the principal even if insolvency occurs due to the borrower’s inability to repay the debt. In comparison, credit loans are considered relatively risky loans because they have no collateral and the bank must bear the loss of principal due to insolvency. In particular, credit loans to people with low to medium credit whose credit scores are in the bottom 50% have a high default rate, making it difficult to break even when interest rates are low. This is why most banks set interest rates on credit loans higher than those on home loans for people with low to medium credit.

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Contrary to basic financial principles, the government’s loan regulations are cited as the reason why the interest rates on home loans at internet banks are nearly 1% higher than the interest rates on credit loans for people with medium and low credit. The government is imposing proportional regulations on internet banks that force the balance of credit loans for people with low to medium credit to exceed 30% of total credit loans. To meet this, internet banks lowered the interest rates on credit loans for people with low and medium credit, and raised the interest rates on home loans in accordance with the policy to suppress household loans.

The problem with the government’s ‘two-way’ regulation to suppress mortgage loans and expand credit loans to those with low and medium credit is that it has limited the growth of internet banks and led to a worsening of their soundness. According to data received from the Financial Supervisory Service by Democratic Party lawmaker Kim Hyun-jung, a member of the National Assembly’s Political Affairs Committee, Kakao Bank’s credit loan delinquency rate rose from 0.78% at the end of last year to 1.03% at the end of August this year. The credit loan delinquency rate of K Bank, the first internet bank, soared from 1.48% to 1.92% during the same period. Toss Bank‘s rate was 1.12% at the end of August, slightly lower than the end of last year (1.15%), but still higher compared to the end of 2022 (0.79%).

An official from an internet bank said, “It is difficult to keep the proportion of credit loans to those with low and medium credit with high default rates to 30% amid the economic downturn, so we are deliberately reducing the proportion of credit loans to those with high credit to meet the regulation.” “There continues to be a situation where we have to give up on highly profitable loans to high-credit borrowers,” he pointed out.

○ “Regulation of 30% proportion, aggregation standards must be changed”

Internet banks, which have suffered a blow to both their profitability and soundness due to the government’s two-way regulations, are seeking a detour by increasing the amount of mortgage loans for individual business owners that do not fall under household loans. In August, K Bank created a sensation by being the first internet bank to launch a 100% non-face-to-face mortgage loan service for individual business owners. Since its launch, more than 1,000 applications have been received every day, and K Bank plans to increase the balance of secured loans for business owners to up to 5 trillion won next year, including mortgage loans for small and medium-sized businesses. Kakao Bank is also preparing to sell mortgage loans to individual business owners through a non-face-to-face method.

The problem is that mortgage loans for individual business owners are sold using only apartments as collateral, so they are in fact similar in nature to household loans. Some point out that this could act as a loophole in the household loan suppression policy and only increase the balloon effect. An official in the financial industry said, “Apartment mortgage loans for small business owners should actually be viewed as a type of household loan.”

In order to minimize side effects such as damage to soundness and balloon effect, some point out that the application standard for the 30% proportion of loans imposed on internet banks for loans to people with low and medium credit should be changed to the new handling amount rather than the balance.

This is because, in a situation where non-face-to-face refinancing loans are free, regulation of balance-based ratios is criticized for only inducing wasteful competition between banks that steals existing customers rather than encouraging internet banks to improve their credit rating models (CSS).

Reporter Jeong Eui-jin justjin@hankyung.com