Going into Debt

Non-life insurance firms and capital providers are advising stock investors to get stock loans, which have been offered mainly by savings banks. As they are attracting customers by means of department store gift cards, lower lending rates and so forth, the size of stock loans offered by non-life insurance companies has increased 600-fold compared to two years ago. Furthermore, the total amount of loans for stock investment is estimated at approximately 14 trillion won, causing a potential problem if the financial markets of emerging countries wobble due to the quantitative easing exit strategy of the United States. 

According to the Korea Financial Investment Association (KOFIA), Orix Capital is currently giving out gift cards to customers obtaining stock loans, while Woori Capital has cut its lending interest rate from 6.5% to 3.9% for the first three months of the loan term and 4.7% for the following three months. IBK Capital and Shinhan Capital have also cut their lending rates or remitted loan extension fees. 

As a result of such aggressive marketing activities, the size of stock loans offered by capital providers increased from 137.3 billion won to 389.6 billion won between January 2011 and the end of April this year. On the part of insurers, the figure skyrocketed no less than 600-fold to around 126.4 billion won during the same period. 

According to KOFIA statistical data, the amount of margin loans soared by more than a trillion won during the last three months to reach approximately 4,924.6 billion won on April 11. That of loans collateralized with deposited shares increased by roughly 400 billion won this year to 7.483 trillion won. When stock loans, which totaled 1.332 trillion won at the end of April, are taken into account the total amount of loans for stock investment approaches 14 trillion won. 

Under such circumstances, experts are warning that a possible drop in stock prices could lead to covering and empty accounts. “Individual investors are finding the KOSDAQ market more attractive as the government has declared it will promote venture firms in the framework of a creative economy, with the lowered lending rates resulting in reduced financing costs,” said Lee In-hyeong, director of the Capital Markets Division of the Korea Capital Market Institute. He continued, “However, they have to bear in mind that losses could surge since the leverage effect is based on stock loans, and margin loans, etc.”

Another industry insider added, “These types of loans are definitely lucrative for financial companies, but they have to refrain from giving such loans excessively because these are highly risky products.