Demand for microcredit loans at Korean savings banks rises amid weak economy

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The outstanding balance of microcredit loans at South Korean savings banks has increased by about 8 billion won ($6.3 million) in the first quarter from three months ago, indicating a rise in the number of vulnerable borrowers that are in need of immediate funds even at the expense of high interest rates.

According to the Financial Supervisory Service on Thursday, the outstanding balance of microcredit loans in the savings banking industry reached 1.02 trillion won in the first quarter of this year, up 8 billion won from the end of December last year.

The increase is in contrast to how total loans during the same period fell to 113 trillion won from 115 trillion won.

By loan type, the outstanding balance of corporate loans declined by 2 trillion won and household loans by 300 billion won.

“There is a consistent demand for microcredit loans, but this year more individuals find themselves in need of emergency loans in the face of rising inflation and a weak economy, either because they have no other options or because they have exhausted their funds,” said an unnamed official from a savings bank.

Microcredit loans are designed to provide loans ranging from 3 million to 5 million won without any specific requirements to borrowers with a credit score of 350 or higher.

The annual interest rates for microcredit loans in the savings banking sector are set at 17 to 19 percent, which places them among the high-interest loan category.

The loans are primarily sought by borrowers in urgent need of funds as they are not subject to the debt service ratio (DSR) regulation.

Due to their high-risk nature, the delinquency rate for microcredit loans is high.

In the first quarter, the delinquent amount of microcredit loans at savings banks reached 74.6 billion won, up 9 billion won from the previous year-end. This was the first time since 2018 that microcredit loan delinquencies have surpassed 70 billion won.

The delinquency rate climbed to 7.3 percent in the first quarter from 6 percent last year. The figure is significantly higher than the overall loan delinquency rate of 5.1 percent in the savings banking industry during the quarter.

Considering the elevated risk and high interest rates associated with microcredit loans, the savings banking sector plans to adopt a more cautious approach to managing their delinquency rates.

Although microcredit loans account for only 1 percent of the total loan portfolio, it is crucial for microfinance institutions to exercise prudence, especially as their earnings have turned negative so far this year.

Out of the 69 savings banks offering microcredit loans this year, only 27 have seen an increase in their microcredit loan balances. The remaining 42 banks have reduced their microcredit loan volumes.

Larger savings banks are already tightening their criteria for offering microcredit loans. Among the top five savings banks, SBI Savings Bank, Welcome Savings Bank, and Korea Investment Savings Bank, have significantly reduced their microcredit loan balances this year.

The top five are SBI Savings Bank, OK Savings Bank, Welcome Savings Bank, Pepper Savings Bank, and Korea Investment Savings Bank.