Rising Acquisition Costs in the Financial Sector Could Impact Borrowers with Low Credit Ratings
By Reporter Lee Yong-an, Money Today | 2023.06.27 05:45
The second financial sector’s procurement costs, which had previously declined earlier this year, have now resumed an upward trend. This increase in acquisition costs is expected to eventually lead to the exclusion of borrowers with low credit ratings. Concerns are rising over the rising delinquency rate and the likelihood of stricter loan thresholds for individuals with lower credit scores. Meanwhile, the second financial sector appears to be taking a passive approach to new loan business, particularly in terms of risk management.
According to the Financial Investment Association’s Bond Information Center, the 3-year bond interest rate (AA+) of specialist credit financial debentures (commonly known as bonds) on the 23rd was recorded at 4.254%. This marks a 0.244 percentage point increase from the previous month. Following the Legoland scandal last year, loan interest rates rose as high as 6%. However, they gradually dropped to the 3% range in March this year, before edging back towards the 4% range in May. Institutions such as card companies and capital companies issue bonds to raise funds. In line with the recent increase in interest rates on treasury bonds, government bond interest rates have also risen to similar levels.
Rebound in Savings Bank Funding Costs
Savings bank funding costs are also on the rise once again. The Korea Federation of Savings Banks reported that the average annual deposit interest rate of savings banks currently stands at 3.98%. Similar to other debentures, the average deposit interest rate had fallen to the 3.7% level in March this year, down from well over 5% at the end of last year. Since then, it has climbed back to 3.8% in April and is approaching the 4% mark once more. Savings banks carry out their lending activities using the deposits they receive from customers.
Savings banks are raising their deposit interest rates as a means to compensate for the decline in deposit balances. Based on data from the Bank of Korea, deposit balances (margins) of savings banks have been decreasing month by month, dropping from 120.7854 trillion won in January this year to 114.6159 trillion won in April. In recent times, the gap in deposit interest rates with banks has narrowed, resulting in a decrease in deposits.
Impact on Borrowers with Low Credit Scores
The concern lies in the fact that those with low credit scores are the first to be affected by the rise in acquisition costs. This is due to the legal maximum interest rate constraint of 20%, which significantly increases the likelihood of secondary financial companies reducing loans to low credit borrowers who are already subject to interest rates close to 20%. Such risk management measures further restrict access to loans for these individuals. As a consequence of higher acquisition costs in real terms, the number of savings banks that no longer extend loans to borrowers with credit scores below 600 has nearly doubled, rising from 7 in May last year to 13 last month.
Especially given the continuing rise in delinquency rates and a decline in performance, the second financial sector is now compelled to exercise greater sensitivity in terms of risk management. Towards the end of last year and the beginning of this year, some capital companies and savings banks halted the provision of certain unsecured loan products altogether, primarily due to a sudden surge in acquisition costs. In the face of increased delinquency rates across various financial sectors, the savings bank delinquency rate in the first quarter rose by 1.7%, reaching 5.1%.
A financial industry official revealed, “During the last year-end period, women warrior-type companies issued short-term high-interest rate bonds, and savings banks offered numerous high-interest rate deposit products. There is currently little possibility of acquisition costs decreasing in the near future,” he concluded.
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Reporter Lee Yong-an, Money Today | 2023.06.27 05:45
Second financial sector procurement costs, which had fallen earlier this year, have returned to an upward trend. Higher acquisition costs are likely to eventually push borrowers with low credit ratings out. Due to the increasing delinquency rate this year, there are concerns that the threshold for loans to people with low credit will increase even more while the second financial sector shows a passive approach to new loan business itself in terms of risk management. According to the Financial Investment Association’s Bond Information Center on the 26th, on the 23rd, the 3-year bond interest rate (AA+) of specialist credit financial debentures (still bonds) was 4.254%, up 0.244 percentage points (p) from a month ol. After the Legoland scandal last year, the interest rate on loans rose to 6%, but fell to the 3% range in March this year, before entering the 4% range again in May. Women warriors, like card companies and capital companies, issue bonds to raise money. As interest rates on treasury bonds have risen recently, interest rates on government bonds have also risen to similar levels.
Savings bank funding costs are also rising again. According to the publication of the Korea Federation of Savings Banks, the average annual deposit interest rate of savings banks is currently 3.98%. As with other debentures, the average deposit interest rate fell to the 3.7% level in March this year after well over 5% at the end of last year. After that, it rose to 3.8% in April and is about to enter 4% again. Savings banks operate their businesses, such as loans, with deposits received from customers.
Savings banks raise deposit interest rates again to compensate for the shrinking deposit balance. According to the Bank of Korea, deposit balances (margins) of savings banks decreased monthly from 120.7854 trillion won in January this year to 114.6159 trillion won in April. Recently, the difference in deposit interest rates with banks has narrowed and deposits have fallen.
The problem lies in the fact that those with low credit are the first to suffer from the increase in acquisition costs. This is because, in a situation where the legal maximum interest rate is limited to 20%, it is very likely that secondary financial companies will start reducing loans to low credit borrowers who are already receiving interest rates close to 20 % to manage risk. Due to the increase in real acquisition costs, the number of savings banks that did not provide loans to borrowers with credit scores below 600 almost doubled from 7 in May last year to 13 last month.
In particular, in a situation where the delinquency rate continues to rise as well as a decline in performance, the second financial sector has no choice but to be more sensitive to risk management. At the end of last year and at the beginning of this year, some capital companies and savings banks stopped supplying some unsecured loan products altogether due to a sudden increase in acquisition costs. Amid increasing delinquency rates across all financial sectors, the savings bank delinquency rate in the first quarter was 5.1%, up 1.7%c in the first quarter.
A financial industry official said, “Women warriors issued short-term high interest rate bonds at the end of last year, and savings banks also sold many high interest rate deposit products during the same period.” “There is little possibility that the acquisition cost will decrease for the time being,” he said.
[저작권자 @머니투데이, 무단전재 및 재배포 금지]
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