As Banks Tighten Lending, Card and Insurance Sectors Also Rein In Loan Management

Household Loans from Secondary Financial Sector Surge by 2.3 Trillion Won in One Month

Will Bank Loan Regulations Shift Demand to Card Loans and Insurance Loans?

Financial Authorities: "No Immediate Additional Measures... Guiding Institution

As the government tightens oversight of household loans, including unsecured credit loans, primarily in the banking sector, the financial industry is closely watching whether these measures will spread to the so-called secondary financial sector, such as insurance companies, credit card firms, and capital companies. This is because the secondary financial sector has also experienced a recent increase in household loans, and if banks further raise their lending standards, a so-called 'balloon effect' may occur, with loan demand shifting to non-bank financial institutions. Financial authorities have stated that, as of now, they are not considering additional regulations or separate guidelines for household loans in the secondary financial sector, and will instead manage the situation by monitoring lending trends by industry.

According to the Financial Supervisory Service on June 17, household loans across all financial sectors, including major commercial banks, surged by 9.3 trillion won at the end of May compared to the previous month, roughly 2.7 times the increase observed in the previous month (3.5 trillion won). While the banks' own mortgage loans decreased, the outstanding balance of unsecured credit loans jumped by 3.4 trillion won, largely due to the influence of so-called "debt-fueled investments."

As the pace of household loan growth has become worrisome, the Financial Services Commission on June 11 ordered commercial banks to proactively strengthen their autonomous control over household loans. Since then, major banks have taken a series of steps to tighten criteria for limit-based loans such as overdraft accounts, and have reduced the credit loan limits, especially for high-income earners.

The market is paying attention to the possibility of a 'balloon effect,' in which, if bank loan regulations are tightened, some loan demand may shift to insurance policy loans (contract loans), card loans, or mutual financial institutions. As bank lending standards become stricter, demand for funds may move toward the secondary financial sector, where access is relatively easier. In fact, the outstanding balance of card loans has recently approached 43 trillion won, and insurance policy loans increased by 600 billion won in the first quarter of this year alone. Insurance policy loans are considered products that borrowers in urgent need of cash mainly use, as they require little additional credit screening or income verification.

Lending in the secondary financial sector is also accelerating. Last month, household loans in the secondary financial sector increased by 2.3 trillion won, up from 1.4 trillion won the previous month. By sector, the increase was led by insurance companies (900 billion won), mutual financial institutions (700 billion won), and specialized credit finance companies (600 billion won).

With demand for capital for debt-fueled investments pushing up loans in the secondary financial sector as well, the industry is closely watching the possibility that strengthened household loan management measures could spread from the banking sector to insurance, credit card, and capital companies. There are also considerable concerns that if more companies exceed this year's household loan growth targets, authorities may introduce further control measures.

Some credit card companies have already taken preemptive action to curb loan supply by reducing card loan limits and suspending telemarketing (TM). An industry insider from the credit card sector said, "There are concerns in the industry that, like in the banking sector, failure to meet targets could restrict future lending activities. While we are maintaining supply for ordinary people and those with real financial needs, we are managing the total volume by adjusting the size of card loans."

The insurance industry is also on alert. Since April, insurance companies have reduced the maximum limit for insurance policy loans from 80% of the surrender value to around 70%. While additional regulations similar to those for banks have not yet been imposed, the industry is monitoring the situation in case calls for tighter management arise should lending continue to grow. However, insurance policy loans are secured by the surrender value accumulated from the policyholder’s paid premiums, and thus differ in nature from ordinary unsecured credit loans. Since these loans are often used for emergency funds such as medical or living expenses, the insurance industry believes that it would be difficult to apply the same level of strict regulation as for unsecured bank loans.

Financial authorities believe that the possibility of a balloon effect resulting from bank regulations is limited. An official from the Financial Services Commission said, "Currently, bank-level controls mainly target large credit loans. There are not many cases of people taking out unsecured loans of 100 million won or more for living expenses, so it is unlikely that demand will immediately shift to the secondary financial sector due to bank regulations." Furthermore, the Financial Services Commission judges that, given the typical user profile for card loans, there are few instances where large sums are borrowed for stock investment purposes.

Accordingly, financial authorities have stated that, for now, they are not considering additional regulations by sector. An official from the Financial Supervisory Service said, "While we will continue to monitor the pace of loan growth and may consider additional interviews or enhanced management measures if necessary, we are not currently contemplating strong measures such as suspending the sale of loan products. For now, our basic policy is to encourage financial institutions to manage themselves within the overall framework of household debt management."

This content was produced with the assistance of AI translation services.