Sharp rise in credit loans in non-banking sector raises alarm bells


The amount of loans extended by Korea’s savings banks to households topped 10 trillion won ($8.9 billion) in 2011.

Preliminary data from the Financial Supervisory Service indicates that savings banks, hurt by a string of scandals last year, are moving back toward risky lending.

It is the first time that the outstanding loans by savings banks to local households surpassed 10 trillion won ― a sharp increase from 7 trillion won in October 2009.

More ominously, that growth is accelerating. Since July, the year-on-year growth rate stayed at around 30 percent, suggesting that savings banks rushed to offer loans to households.

The heady growth of household loans by savings banks poses two main problems. First, it hampers the financial regulators’ efforts to curb the country’s broader household debts. Second, the current trend, if unchecked, could backfire with a vengeance, possibly bringing a new round of suspensions for savings banks in poor financial health.

The regulators were credited with tightening the household lending channels at banks, but it was simply a transfer of lending sources from banks to savings banks as consumers with poor credit scores flocked to the non-bank institutions.

Failing to keep the ballooning home loans by the non-bank firms is particularly dangerous because savings banks are expanding their credit loans to individuals. This carries much higher risks than other forms of lending, such as mortgages.

The proportion of credit loans by savings banks accounted for 45 percent in end-2010 and rose to upwards of 60 percent.

The ratios of non-performing loans at savings banks doubled to 20 percent during the same period.

“After two major consolidations, the total assets owned by savings banks shrank from 90 trillion won to 60 trillion won, but their credit lending to households is on the rise, at nearly 10 percent of their total assets,” said an FSS official.

The slump of project financing, based on real estate investments, seems to be driving savings banks to secure an alternative source of revenue to safeguard their asset scales, but risk management for such credit loans is tricky at best, analysts said.

Individuals who get credit-based loans at savings banks after getting turned down at commercial banks are more likely to fail to honor the debt payment in time.

The FSS said it would strengthen monitoring of loan transactions at savings banks following the sharp rise of credit loans.

Last year, the local authorities suspended business operations of 16 savings banks, which laid bare the lingering impact of their reckless lending practices such as project financing.

By Yang Sung-jin (insight@heraldcorp.com)