Loans for self-employed surge at Korean online banks

[Courtesy of each company]

Self-employed individuals in South Korea are turning to loans extended by online-only banks as they offer contactless and unsecured credit loans at relatively lower interest rates of under 5 percent.

According to the Korea Federation of Banks on Tuesday, the average annual interest rate for loans for the self-employed offered by KakaoBank Corp. stood at 5.84 percent in June.

The online lender started offering loans to individual businesses in November last year and has been cutting interest rates every month.

“From March to June, we lowered the interest rate on individual business credit loans by up to 0.4 percentage point and our lowest annual rate this month was 4.33 percent, the lowest in the banking sector,” said a KakaoBank official.

Another local online lender Kbank offered an annual interest rate in the low 5 percent range between January and May, similar to Korea’s four major commercial banks.

The lender, however, lowered rates by up to 0.4 percentage point this month, bringing the lowest annual rate to 5.42 percent.

Toss Bank Co. lowered the rate to the low 7 percent range in June from 8 percent early this year.

The country’s four major banks - KB Kookmin, Shinhan, Hana and Woori - have annual rates ranging from 5.24 to 5.94 percent but they require collateral.

“Online banks issue loans solely based on the credit of individual business owners,” said an official from the financial circle. “Considering that commercial banks demand real estate as collateral for the same credit loan, online banks‘ interest rates have become more competitive.”

The balance of loans for the self-employed is also growing at the three online lenders.

The combined loan balance is projected to reach 2.89 trillion won ($2.19 billion) in the second quarter, up 23.5 percent from the previous quarter. The amount is significantly higher than the 0.32 percent growth of four major banks during the same period.

Online lenders attribute the demand growth to their own credit scoring models based on non-financial data to target niche customers.

Data showed that 35 percent of individual businesses that borrowed funds from KakaoBank last month were those with less than three years of business experience.

Most of them were in wholesale and retail, food, and service sectors. This is in contrast to commercial banks, which tend to lend to manufacturing companies with longer business histories and stronger credit and collateral.

Online banks’ capacity to manage loan risks, however, remains an issue. The industry sees that non-performance risks are likely to surface as the extension of loan maturity and interest repayment suspension for the self-employed and small business owners ends next month.

The delinquency rate of online banks is higher than that of commercial banks. The rate of Toss Bank stood at 1.32 percent in the first quarter and Kbank 0.82 percent, while that of Kakao Bank was 0.58 percent in the second quarter.