Private Lenders’ Profits Growing in Korea: Not Good

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Growing Profits is Good, Right? Not So Fast
This seemingly innocent post here reported that the interest income earned by private lenders in Korea has risen handsomely. The five largest private lenders, A&P Financial Co. (Rush & Cash), Sanwa Money, Welcome Credit Line, Lead Corp. and Baro Credit, posted a greater than 20% increase in interest income during 2010. The article also reported that smaller private lenders’ interest income rose by over 30% during the year. Well, herein lies the problem.

Consumer Debt Growing
Last week, the Seoul Gyopo Guide pointed out some issues that are facing everyday Koreans, and the banks that lend money to them. Increasing energy costs, and food inflation, have been coupled with a moribund real estate market. With household living costs rising, Koreans have borrowed in order to pay for food, gas, and other costs. The recent headlines point out that Korean consumers have been using private lenders to further borrow money in order to pay for their living expenses. Private lenders, of course, are eager to lend. So you have willing lenders and struggling borrowers: that is not a healthy combination. For now, as long as the borrowers do not default, the private lenders will continue to enjoy greater interest income. For now. If Korean borrowers from these institutions start to fail to repay, then these same private borrowers will be faced with problems similar to those faced by the Korean credit card companies in the early 2000s.

Credit Card Problems Redux?
Korea has faced this problem in the past. Less than 10 years ago, enormous credit card problems hit the subsidiaries of the largest banks, which had to absorb the losses resulting from the inability of Koreans to pay their credit card debts. Now, the same ingredients are brewing once again into an unsavory stew. Some of the cracks are starting to show. Saving banks, a small portion of overall deposits in Korean banks (approximately 5%) have begun to fail. These banks are sitting on loans to real estate, project finance, and individuals. As the borrowers continue to struggle, and deposits do not grow, the regulators have had no other choice than to close these savings banks. While the headlines regarding the private lenders seems positive, make no mistake. They are not positive at all. They are indicative of over-borrowing by Koreans who have felt that their only way to maintain their standard of living is to borrow from aggressive lenders. Some of the loans are in the form of home equity loans. The Korean borrower pledges his/her apartment in order to access money from the private lender. Given that the value of real estate in Korea has actually fallen, particularly outside of Seoul, this is reminiscent of the problems that have plagued the U.S., where people have borrowed at the same time that real estate values have declined.

Conclusions
Some aspects are quite different from the early 2000s. Korean corporations’ products are, overall, on much better footing in the global marketplace. There is no doubt about that. Every consumer of electronics knows Samsung, and every auto buyer knows Hyundai. While that may have been true in the past, now those brands stand in the upper echelon amongst their global competitors. However, the question is whether or not Korean employees’ wealth has risen as well. The answer to that, unfortunately, is no. There are a number of reasons for that. Corporate waste is high, and inefficient compensation has led to a situation where employees have not enjoyed the fruits of their employers’ success. Small and medium sized businesses do not have the same hope of success as they do in other countries. Until these problems are addressed and everyday Koreans’ wealth increases, the domestic Korean economy will remain in a precarious position. The headlines regarding the private lenders highlight this fact.

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