Amount of credit offered by securities firms nearly tripled in last six months
By Anna J. Park
Amid the current record-low interest rate environment, the idea of investing in stocks with borrowed money is becoming more and more prevalent in Korea, especially among the younger generation. A multitude of retail investors with a small amount of capital have turned to borrowing money from securities firms to make investments in the stock market, which are believed to return profits higher than the interest borrowers accrue from the loans.
As the number of people taking out such loans to invest in the local stock market continues to increase, the total amount of credit offerings by securities firms has also reached an all-time high. According to the Korea Financial Investment Association (KOFIA), the total amount of credit offered by financial firms stood at 17.44 trillion won ($14.84 billion) as of Monday. It is the highest amount recorded since the KOFIA began compiling related statistics back in 2010.
The figure is particularly surprising as the amount of money loaned by the brokerage industry only stood at 6.57 trillion won at the end of March this year.
Against the backdrop, major brokerage houses announced a temporary halt in their lending to customers. It is because the Act on Financial Investment Services and Capital Markets prohibits brokerage houses from lending more than 200 percent of their own capital.
Stock brokerage houses lend money to their customers either by purely giving loans based on customers' credit ratings or by using customers' owned shares as collateral. Most major securities firms in Korea have halted either one or both of the two lending types, as the stock markets' overheating continues.
Samsung Securities announced Tuesday that it would halt lending money for stock investments from Tuesday, in both credit-rating loans and stock collateral loans. This is the firm's second time this year to suspend newly lending money to customers, following a similar case in late July.
The securities firm is not yet sure of when new loans will be available again. Back in late July, it took three days for the firm to resume issuing loans.
"It's been two days now, yet currently, we're not sure when giving new loans could be resumed again," an official at Samsung Securities told The Korea Times.
"Mainly, the current situation has to do with the drastic increase in the number of new customers this year. Not only the number skyrocketed early this year, it also saw a huge jump because of the firm's management of the IPO process of Kakao Games early this month," the official added.
Other major firms also halted lending money this year. Korea Investment & Securities stopped giving new loans based on credit ratings from last Friday, while stock collateral loans have been suspended since June. Shinhan Financial Investment ceased to grant stock collateral loans from Wednesday. NH Investment & Securities and KB Securities have also suspended granting stock collateral loans.
What is worrisome is that people in their 20s have the most loans in terms of ratio. According to main opposition party lawmaker Yoon Doo-hyun, the increased rate of the total amount of loans from securities firms was highest among those in their 20s with 132. 2 percent from 2017 to June this year.
This is the highest increase rate among all age groups; people in their 30s, 40s or 50s each increased the total amount of loans from the brokerage industry with 39.4 percent, 22.4 percent and 15.1 percent, respectively.
Experts see that it is understandable that people are flocking to stock markets amid excessive liquidity and the zero-range interest rates, yet they urged to take caution on the part of retail investors in volatile market conditions.
"Young people who have been frustrated with soaring housing prices and the bleak economic outlook tends to be affected most by a speculative mindset that the stock market is the only way to increase their fortune significantly," a market insider said on condition of anonymity.
"Relying too much on stock investment with loans could be fatal in this market situation when short-term corrections could happen at any time," Kim Hak-gyun, research head at Shinyoung Securities, stressed.