The ongoing recession has led to domestic banks recording the highest credit card loan arrears rate in 20 years, while card loans (long-term credit card loans) have been breaking monthly highs for several consecutive months. The high-interest card loans increase revenue for card companies, but the potential rise in arrears threatens the financial stability of these companies.
According to the Bank of Korea and the Korea Federation of Banks on the 18th, the domestic commercial banks' credit card loan arrears rate soared to 3.5% as of January. Earlier this year, the average arrears rate for credit card loans in the previous year was recorded at 3.1%, marking the highest level in 20 years since the credit card crisis in 2004 when the arrears rate was 4.1%. This figure has increased by approximately 0.4 percentage points.
The balance of card loans has also significantly increased. As of the end of February, the card loan balance of the nine major card companies (Lotte, BC, Samsung, Shinhan, Woori, Hana, Hyundai, KB Kookmin, and NH NongHyup Card) was 42.9888 trillion won, which is an increase of about 250 billion won compared to the previous record balance of 42.7309 trillion won at the end of January. This surge is attributed to the increased lending thresholds in the banking sector, causing low-credibility small business owners and the working class to resort to card loans.
There is a rising trend of refinancing through taking out loans again from card companies due to inability to repay card loans, as well as revolving credit (partial amount rollover agreement). The balance of refinancing loans in February was 1.6843 trillion won, an increase of 73.3 billion won compared to the end of January (1.6110 trillion won). Meanwhile, the revolving credit rollover balance also increased by about 10 billion won to 7.0613 trillion won from the previous month (7.052 trillion won).
Card loans, often referred to as 'emergency cash windows', are loans that low- to mid-credit borrowers use urgently when they need money. With high interest rates, these loans are a significant revenue source for card companies, but the increasing possibility of arrears adversely affects their financial health. According to statistics from the Korea Credit Finance Association, the average interest rate for card loans reaches as high as 15.29%. Some low-credibility borrowers with credit scores below 700 are burdened with interest rates close to the legal maximum of 20%, at 19.32%.
Taking out refinancing loans to pay off card loans and postponing payments through revolving credit, known as 'rolling over', leads to a decline in consumers' creditworthiness, negatively impacting the arrears rate. Therefore, card companies find themselves in a difficult position to continue increasing lending indiscriminately. However, as legal lending entities willing to take on low-credibility borrowers have long gone bankrupt, the number of customers seeking card loans has recently increased amidst the prolonged economic downturn.
The concern is that, as household loans are on the rise again, forecasts for an increase in card arrears rates have emerged. As of the 10th, the total household loan balance of the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, and NH NongHyup Bank) stood at 739.7256 trillion won, an increase of 1.1745 trillion won compared to the end of March. Financial authorities, wary of this trend, began requesting total amounts and risk management of card loans since the end of last year, while strengthening monitoring of arrears and loan structures.
This year, card companies are expected to focus their efforts on reducing non-performing loans (NPL) and managing the increasing demand for card loans. Major card companies such as Hyundai and Samsung began enhancing their credit assessment models (CSS) last year, and recently, NH NongHyup Bank has started developing the NongHyup Card CSS. A card industry official noted, "This year, while new business is also important, it is more crucial to respond to the unstable external environment," adding, "We will strengthen our risk management capabilities to ensure the health of our assets."