Shrinking Access to Household Loans: A Growing Concern

A significant portion of South Korea’s savings banks are scaling back or entirely ceasing the provision of new household loans,raising concerns about access to credit for everyday citizens. recent data indicates that over half of the 79 savings banks operating in the country did not issue any new household loans last year. This trend is particularly pronounced among smaller, non-capital savings banks, which often lack the resources and infrastructure to effectively manage the risks associated with unsecured lending.

the Root Causes: CSS Deficiencies and Rising Bad Debt

Several factors contribute to this concerning trend. One key issue is the lack of elegant CSS capabilities among smaller savings banks. These systems are crucial for accurately assessing credit risk and making informed lending decisions. Without them, these institutions are hesitant to offer household loans, fearing an increase in non-performing assets. Furthermore, the rising cost of bad debt, exacerbated by the current economic climate, further discourages these banks from engaging in household lending.

The Shift to High-Risk Investments: A Necessary Evil?

Faced with limitations in household lending, many non-capital savings banks are increasingly turning to high-risk, high-yield investments, such as real estate project financing (PF).while these investments offer the potential for greater returns, they also carry significant risks, potentially destabilizing the financial health of these institutions and the broader economy.This shift highlights the urgent need for solutions that enable savings banks to fulfill their traditional role of providing accessible credit to the public.

Regional Disparities: A Metropolitan bias

An analysis by the Korea Financial Research institute reveals a significant disparity in lending activity between metropolitan and non-metropolitan areas. While the population distribution is relatively even (50.9% in metropolitan areas and 49.1% in non-metropolitan areas as of 2024), a disproportionate share of savings bank credit is concentrated in metropolitan regions. Specifically,65.7% of credit is extended to borrowers in metropolitan areas, compared to only 34.3% in non-metropolitan regions. This imbalance underscores the challenges faced by local savings banks in serving their communities.

Regulatory Constraints: Hampering Growth and Innovation

Stringent regulations, including restrictions on securities investments, sales areas, and mandatory lending quotas, further impede the ability of local savings banks to expand their household loan portfolios. The limitations on operating zones, in particular, are seen as a barrier to local economic revitalization, especially given the differences in mandatory lending requirements between metropolitan and non-metropolitan areas. These regulations, coupled with the impact of legal interest rate cuts, create a challenging habitat for savings banks seeking to serve their communities.

Expert Opinions: A Call for Regulatory Differentiation

Financial experts are advocating for a differentiated regulatory approach that recognizes the unique challenges faced by smaller savings banks. They argue that the current one-size-fits-all regulatory framework fails to address the growing polarization between large and small-to-medium-sized financial institutions. By tailoring regulations to the specific needs and capabilities of different types of savings banks, policymakers can foster a more competitive and inclusive financial landscape.

We can consider ways to induce the expansion of the sales base,including mid -sized companies,when calculating the credit rating ratio in the sales area.
Park Joon -tae, a researcher at the Korea Institute of finance

Park Joon-tae, a researcher at the Korea Institute of Finance, suggests exploring ways to encourage the expansion of sales bases, including mid-sized companies, when calculating credit rating ratios within sales areas. This approach could help level the playing field and enable smaller savings banks to better serve their local communities.

Looking Ahead: Finding Solutions for Sustainable Growth

Addressing the challenges faced by savings banks in household lending requires a multi-faceted approach. This includes investing in CSS infrastructure, streamlining regulations, and fostering a more supportive environment for local financial institutions. By working together, policymakers, industry stakeholders, and financial experts can create a more sustainable and inclusive financial system that benefits all members of society.