With the stock market booming, debt-backed investing by retail investors is spreading again, swelling banks’ overdraft credit line balances. Financial authorities are tightening their stance on managing total household lending, but money is flowing into stocks and demand for overdraft credit lines is rising quickly. Banks can boost interest income by expanding overdraft lines mainly for relatively high-credit borrowers, but analysts say they face a dilemma because regulatory pressure could grow if loan growth persists.

As of May 18, overdraft credit line balances at the five largest banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup Bank — rose from 39 trillion won at the end of last month to more than 41 trillion won this month, the financial sector said. That works out to an average daily increase of more than 300 billion won in business-day terms. The balance is the highest since the end of January 2023, about 3 years and 4 months ago.

Overdraft credit line balances have repeatedly risen and fallen this year in line with the stock market. The market sees recent stock gains as being strongly influenced by retail investors’ FOMO (Fear Of Missing Out) sentiment. The KOSPI has surged in a short period, and anxiety about missing the rally is driving more cases of people using overdraft credit lines to invest, even belatedly.

Retail investors’ leverage investing has also expanded quickly. Brokerage margin loan balances exceeded 36 trillion won for the first time ever, and customer deposits also built up to more than 130 trillion won. Some subscriptions for IPO shares of AI companies also drew in large amounts of investment funds, which was reported to have stimulated demand for short-term loans.

Banks have also been detecting changes in money flows. At some points, demand deposit and time deposit balances fell at the same time, and the financial sector believes a significant portion moved into the stock market. In March, more than 8 trillion won flowed out of demand deposits and about 2.8 trillion won out of time deposits, according to compiled data.

Overdraft credit lines allow borrowers to withdraw and use funds freely whenever needed, with interest charged only on the amount actually used. Because loan procedures are relatively simple, they are often used for short-term investment funds. For borrowers, however, it can be harder to feel the size of their debt than with regular loans. Critics say repeated use and repayment can lead to loans increasing without borrowers recognising the actual size of their debt.

Interest rate burdens are also significant. Disclosures by the Korea Federation of Banks show the average overdraft credit line rate at the five major banks is in the high 4 percent to 5 percent range per year. For internet-only banks, it is in the 5 percent to 6 percent range.

Even so, investment demand continues to flow in because more retail investors judge expected stock market returns to be higher than borrowing costs. The problem is that if market volatility grows, the risk of losses could also expand sharply.

Banks do not see the recent expansion of overdraft credit lines as purely a burden. With total household lending limits making it difficult to expand mortgage lending, increases in overdraft credit lines among high-credit borrowers help support profitability.

The average credit score of overdraft credit line users at the five major banks is said to be in the high 900s. That means lending is growing mainly to prime borrowers with relatively low delinquency risk.

Because overdraft credit lines carry an additional spread compared with general unsecured loans, banks can also expect increased interest income. Some analyses say the expansion has also affected the widening of the loan-to-deposit interest margin gap. Still, banks are not moving aggressively with marketing. Unused limits tie up funds, and banks cannot ignore the authorities’ total lending management stance.

Financial authorities are also closely watching the recent increase in unsecured lending. For now, they are stopping at the level of warning messages rather than direct regulations that could stoke market overheating. That is because excessive regulation during a stock market boom could dampen investor sentiment.

But if the stock market strength lasts longer, the rise in overdraft credit lines could be mentioned as a target for additional oversight by financial authorities. Because overdraft credit lines are also included in total household lending, analyses say banks may reduce limits on their own or adjust interest rates if the increase continues.

A financial sector official said overdraft credit line use appears to be rising rapidly as demand increases along with the recent stock market uptrend. The official said banks may tighten internal controls if growth accelerates too quickly because they also face the burden of total lending management.