Seoul, South Korea - South Korea's second-tier lenders, including credit card companies, savings banks, and insurance companies, have reported a significant surge in loans over the past month. This surge is attributed to a "balloon effect" where borrowers, facing tighter lending conditions from major banks, are turning to these alternative lenders for credit.

According to financial industry sources, credit card loans, cash advances, and personal loans offered by credit card and capital companies increased by more than KRW 900 billion (approximately USD 675 million) last month. Savings banks also saw a surge in personal loans, with an increase of KRW 400 billion. Notably, insurance policy loans, often considered a sign of economic hardship, grew by around KRW 300 billion.

The combined increase of over KRW 1.5 trillion in loans from second-tier lenders is the largest since July 2021, when there was a surge in demand for loans due to public offerings of shares.

Factors Driving the Surge

Tightening credit conditions at major banks: As major banks have tightened their lending standards to comply with regulatory measures and manage risk, borrowers have sought alternative sources of credit.
Aggressive marketing by second-tier lenders: In an effort to capture market share, credit card and capital companies have been more aggressive in their lending practices, offering more flexible terms and lower interest rates.
Economic hardship: The economic downturn has led to increased demand for credit among individuals and small businesses.
Regulatory Response

Concerned about the potential risks associated with the rapid growth of lending at second-tier lenders, the financial authorities are stepping up their oversight. The Financial Supervisory Service (FSS) is conducting on-site inspections of savings banks and agricultural cooperatives this week to assess their lending practices and ensure compliance with regulations. The FSS will pay particular attention to large-scale loans for residential complexes.

Implications

The surge in lending at second-tier lenders raises concerns about potential risks to the financial system, such as increased household debt and a higher risk of loan defaults. The financial authorities will need to carefully monitor the situation and take appropriate measures to mitigate these risks.