Retail ‘Debt Investing’ Surges as KOSPI Nears 9,000, Driving Deposit- and Insurance-Backed Loans Higher

Borrowed-money stock bets heat up as the KOSPI approaches 9,000

Deposit- and insurance-backed loans near $28.8 billion

South Korea’s craze for “debt-fueled investing” is showing little sign of cooling despite tighter lending curbs from regulators. As the stock rally continues, more investors are raising cash through loans backed by bank deposits and insurance policies.

Outstanding deposit-backed loans at the five major banks — KB Kookmin, Shinhan, Hana, Woori and NH Nonghyup — stood at 6.6415 trillion won ($4.8 billion) as of June 18, according to the financial industry on June 19. That is up 341.3 billion won ($247 million) this year alone. The balance has continued to rise since exceeding 6 trillion won in July last year. If the trend persists, deposit-backed loans will top 7 trillion won ($5.1 billion) for the first time this year.

Loans against insurance policy surrender values are also surging

Insurance policy loans, which allow borrowers to tap the surrender value of their policies as collateral, have also climbed sharply. Outstanding policy loans at South Korea’s three largest life insurers — Samsung Life, Kyobo Life and Hanwha Life — totaled 32.4224 trillion won ($23.4 billion) at the end of May, up 479.3 billion won ($347 million) from a month earlier. The balance has increased by 970.5 billion won ($702 million) over the first five months of this year.

Debt-fueled investing persists despite curbs as deposit- and insurance-backed borrowing jumps

Investors flock to lower-cost loans with annual rates in the 3% to 4% range; unused overdraft credit lines still exceed $38.7 billion

For many borrowers without top-tier credit, these loans offer a cheaper way to raise short-term funds than overdraft credit lines, which often carry annual interest rates above 5%. That helps explain the rise in deposit-backed loans and insurance policy loans as debt-fueled stock investing gathers pace.

Both products sit largely outside the latest regulatory squeeze. South Korea’s financial authorities have pushed banks to curb household lending after loan growth failed to slow, prompting lenders to cut credit-loan and overdraft limits through voluntary measures. But deposit-backed loans and policy loans are harder to restrict because they are secured by deposits and insurance contracts. In April, authorities lowered the cap on policy loans to 70% of surrender value from 80%. Even so, balances kept climbing. Outstanding policy loans at Samsung Life, Kyobo Life and Hanwha Life rose 479.3 billion won ($347 million) from the previous month to 32.4224 trillion won ($23.4 billion) at the end of May.

Overdraft lending has also held up even after some banks began cutting limits more aggressively from June 8. Outstanding overdraft loans at the five major banks totaled 42.9477 trillion won ($31.0 billion) as of June 18. The balance was little changed from a week earlier even after KB Kookmin and Hana capped all personal unsecured loans at 100 million won ($72,000), raising the bar for borrowers. Instead, the utilization rate on overdraft lines climbed to 44.5%.

That is helping keep overall bank credit growing. Outstanding unsecured household loans at the five banks reached 108.3339 trillion won ($78.2 billion) on June 18, up 1.8186 trillion won ($1.31 billion) so far this month. That accounted for more than half of the 3.1168 trillion won ($2.25 billion) increase in total household lending. Unused overdraft credit lines at those banks still stood at 53.6322 trillion won ($38.7 billion).

"Credit lending could keep rising because banks cannot cut limits on overdraft accounts that have already been contracted," an executive at a commercial bank said. The executive added that lenders are checking loan volumes every day to avoid exceeding this year’s overall loan-growth target.

The government’s target for household loan growth this year is 1.5%, down 0.3 percentage point from last year’s 1.8% goal. It asked the five major banks to limit household loan growth to 800 billion won to 900 billion won ($578 million to $650 million). It also told mutual-finance institutions, including community lender Saemaeul Geumgo, not to increase household lending from last year.

Kim Jin-seong and Kim Su-hyeon, Hankyung.com reporters, jskim1028@hankyung.com