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“Loans in Disguise”

Posted June. 02, 2007 03:25,   


Mr. Han (37), who started an Internet shopping mall business in early February, used his 31-pyeong house worth 850 million won in Gangnam as collateral for a loan of 600 million won the same month.

Unlike the home mortgage loan limiting the loan cap in line with one’s income levels, he used the small business loan so he could borrow up to 70 percent of the market value of his home.

It was revealed that the amount of loans using apartments and residential houses as collateral as in the home mortgage loan market topped 18 trillion won out of total small business loans.

Early this year, the government came up with various regulations on home mortgage loans to stabilize the housing market, but quite a number of borrowers used less restrictive small business loans, whose volume exceeded normal levels.

According to an analysis of small business loans by the Financial Supervisory Service (FSS), which Dong-A Ilbo acquired, the number of small business loans using houses as collateral increased to 18.2 trillion won as of the end of March, an increase of 1.2 trillion won compared to last year.

Knowingly Ignoring a Loophole-

A reporting team from Dong-A Ilbo visited Shinhan Bank on May 30 to figure out the current practice of small business loans, saying they wanted a private business loan.

The reporters said they expect to start an online shopping mall business soon and planned to use a 27-pyeong apartment (with the market value of 497.5 million won) in Jamsilbon-dong, Songpa-gu, Seoul, adding they have not registered the business yet.

A bank staff said, “It is easy to get a business registration at a district office, so you can go and get it from there,” adding, “We can extend the loan of 370 million won, 75 percent of the market value, at a floating rate of 6.1 percent.”

The team asked, “Can we buy a property with a small business loan,” and the staff gave a “kind” answer, “The authority is conducting an investigation on expedient lending so you need to watch out for it.”

On the same day, they received counseling on a loan with the same conditions at Kookmin Bank and were told that they could get a small business loan with a house as collateral.

A Kookmin Bank employee said, “The home mortgage loan is subject to myriad regulations, so a non-income earner cannot receive a loan higher than 50 million won, but with the small business loan, it is possible up to lend up to 360 million won.”

He added, “After borrowing it, if the business operation fund records that are to be submitted within six months are poor, the loan could subject to early repayment. However, as long as a bank has secured the collateral, it will not be hard on the credit assessment.”

Home Mortgage Loans in the Medium-Term Top 18 Trillion Won -

Home mortgage-induced small business loans recently exceeded 18 trillion won after reaching 17 trillion won at the end of last year, up from 14.2 trillion won at the end of 2005.

In April last year, a measure was underway in which a 40 percent debt-to-income (DTI) ratio was to be imposed for apartments worth more than 600 million won in speculative regions. Since then, the demand for home mortgage loans has been reduced while that for small business loans skyrocketed.

In fact, the increasing amount of the small business loans in the first quarter of this year was 1.2 trillion won, a similar amount to the increase in home mortgage loans (of 1.2045 trillion won) in the same period. In particular, the volume of small business loans this March increased 500 billion won, but that of home mortgage loans merely rose 43.8 billion won.

It is also problematic that most of the small business loans are for operation purposes that are hard to identify.

As of the end of March, the operation funds out of the total small business loans of 317.2 trillion won were 251.1 trillion won, which is 3.8 times greater than the facility funds (66.1 trillion won). As of the end of 2005, the facility funds were greater than the operation funds by 4.2 times. It shows that the recent small business loans are not extended for facility investment.

Possible Medium-Term Loan Defaults without Systematic Credit Assessment –

It is also worrisome that not only did the small business loans with house collateral skyrocket, but also the businesses that borrowed the loans are related to the real estate-related industry.

According to the FSS’s “small business loans for business type” report written at the end of February this year, loans worth 76.9 trillion won were extended to the construction and real estate business (24.8 percent of total small business loans).

It is possible that with the real estate bubble bursting, banks that increased the volume of the small business loans will be hard hit.

In fact, the delinquency rate of the small business loans rose 1.3 percent at the end of March this year from 1.1 percent at the end of December last year. The FSS expressed concern that the April delinquency rate would go higher than the March’s.

Financial experts point out that possible defaults could happen because each bank has different private business loan standards, and credit assessment methods are not sophisticated.

Bae Sang-geun, researcher at the Korea Economic Research Institute said, “There was the 1997 foreign exchange crisis due to banks’ excessive extension of business loans, and in 2002, there was a national credit card crisis due to excessive household loans,” adding, “Banks need to have higher credit assessment capacity and to be responsible for non-performing loans.”