Loans from high-interest second-tier lenders soar amid tight lending rules

Loans from savings banks, credit unions and other secondary financial institutions rose sharply last month as authorities tightened credit regulations for major banks, officials said Sunday.

Loans from savings banks, credit card firms, insurance companies and other second-tier lenders surged over 1.5 trillion won ($1.02 billion) in October, the largest gain since July 2021, according to the officials from the financial sector.

In detail, cash advances and other loans from credit card firms and capital companies increased over 900 billion won in October, and household loans from savings banks went up 400 billion won. Insurance loans also gained around 300 billion won.

The growth was attributable to the "balloon effect," as demand has shifted to second-tier lenders as major banks were forced to reduce household loans in line with the financial authorities' efforts to curb surging household debts and rein in rising home prices, mostly in Seoul and the surrounding areas.

An economic slowdown amid weak domestic demand also appeared to have caused more ordinary people and vulnerable classes to turn to such loan programs despite high interest rates, according to the officials.

"The amount of loans from the secondary sector is expected to hover well above the level deemed appropriate. We are to take steps to manage the situation," a government official said.

One of the measures under consideration is requiring second-tier institutions to submit their annual targets for loan amounts, which now is only necessary for first-tier banks, the official added.

But the authorities are not likely to enforce strict lending restrictions for second-tier institutions, as many of those who seek loans from the sector are low-credit borrowers or those who urgently need cash for living expenses rather than mortgages, other officials said. (Yonhap)