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(Yonhap Feature) Individuals hunt for high returns amid record low rates

2016/08/19 09:00

By Park Sang-soo

SEOUL, Aug, 19 (Yonhap) -- It may sound bizarre to say that a day of near-zero interest rates may come in Asia's fourth-largest economy, which would present a more daunting conundrum for individuals already struggling with low investment returns -- how to manage their precious money and earn decent yields.

Indeed, the prospect of further monetary easing, the still sluggish local stock market, and bond yields at rock-bottom levels have already prodded some individuals to search for tools that deliver high returns.

Kim Guk-hyun, a 39-year-old office worker in Seoul, is among those who are hunting for modest returns. He sometimes goes to a pub in downtown Seoul for a drink along with his friends, but his visit to one pub in eastern Seoul, named Bronx, is for different reasons -- to check whether its business is going well and lend support to jack up sales at the craft beer house.

Kim is one of 88 creditors -- strictly speaking, an investor -- of the beer store which opened last year.

Names of the creditors who joined a peer-to-peer lending to Bronx are written on a wall of its Seonneung branch (Courtesy of 8Percent). Names of the creditors who joined a peer-to-peer lending to Bronx are written on a wall of its Seonneung branch (Courtesy of 8Percent).

"I have a wide range in my investment portfolio, but I decided (to extend loans) for higher returns," said Kim. According to Kim, his return is roughly about 5 percent, after taxes are deducted, which is far higher than the average bank deposit rate.

Bank deposits could be the safest investment, he said, but local banks deliver a mid-1 percent return, which means roughly 1 percent yield is guaranteed when taxes are taken into consideration. South Korea's benchmark interest rate currently stands at a historic low of 1.25 percent, and is widely forecast to fall further down the road.

"I had to find something that can deliver me high returns, and that should be higher than the bank deposit rates," he said declining to reveal the amount of his investment.

Jung Hyun-song, the co-owner of Bronx, says he was surprised to see the campaign to raise 100 million won(US$90,700) through the so-called peer-to-peer (P2P) loan scheme be completed in just "four minutes."

   "I thought things would go smooth, but I was really surprised by the result," said Jung.

At first, Bronx had faced difficulty in financing its expansion due to its low credit rating. In particular, local banks shunned lending to such a small business amid a protracted economic slowdown, and investors who lost money on small businesses remained more conservative, he said.

Song Joon-hyeob, a spokesman for 8Percent, the P2P lender that arranged the Bronx deal, says the Bronx case reflects the trend that individual investors, just like Kim, are willing to park their money in high yield-generating investment vehicles.

"Retail investors who look for mid-risk and mid-return investment are now taking a look at peer-to-peer lending," said Song. "Their interests in P2P lending are growing recently as low bank deposit rates are not very attractive to them."

   Mirroring the popularity of the fledgling financial service, accumulated P2P loans reached over 150 billion won as of June this year, and the figure is expected to top 300 billion won by the end of the year.

Co-owners of Bronx in Seonseung pose for a photo in front of the store. (Courtesy of 8Percent) Co-owners of Bronx in Seonseung pose for a photo in front of the store. (Courtesy of 8Percent)

P2P lending refers to a new type of loan extension to individuals or businesses through social network services or the Internet, and these services are provided online, so they are cheaper than conventional financing, for example, bank loans.

P2P lending covers a wide range of services, including loans to start-ups and self-employed businessmen with their interest rates on such services hovering at 8 percent. The borrowers are required to redeem the principal and interest on a monthly basis.

Choe Yang-sun, a 41-year-old housewife, is another case of a "smart" investor who recently made a deposit at a local savings bank in Seoul which offers a roughly 2-percent rate.

"At first, I planned to deposit money in banks. But they offered too low rates," she said. "The rate (2 percent) may be low, but it is high compared to bank deposit rates," she said.

According to industry data, deposits at local savings banks stood at a combined 40.06 trillion won as of end-June, up 6.33 trillion won or 18.5 percent, from a year earlier, and the end-June reading marks a 1.8-percent rise from the previous month.

A large chunk of money started to move to savings banks since March of last year, when the country's benchmark interest rate hovered below 2 percent.

And the pace of deposit increase accelerated at double digits. In June of this year, deposits at such financial institutions increased 18.5 percent, the fastest pace in six years.

This picture dated on July 11, 2016, shows a customer visiting a bank window at a local savings bank in Seoul. (Yonhap) This picture dated on July 11, 2016, shows a customer visiting a bank window at a local savings bank in Seoul. (Yonhap)

There is also another unconventional but successful investment case. Earlier this year, a 32-year-old office worker surnamed Park chipped in a small amount of money to invest in a locally produced movie. Nowadays, he smiles whenever he reads news articles on "Operation Chromite," which tells the story of the famous Incheon landing during the 1950-53 Korean War. Starring Lee Jung-jae, Lee Bum-soo and Hollywood star Liam Neeson, the movie has drawn over 5 million viewers since its premiere in late June.

"At first, I parked the money without much expectation to earn money," he said. "But my decision turned out to be good."

   Local brokerage firm IBK Investment & Securities Co. arranged crowdfunding for the movie. A total of 288 customers invested a combined 500 million won in the movie. The funding for "Operation Chromite" was completed in just seven days, according to IBK Investment & Securities.

The investors receive a 5.6-percent return if the accumulated viewers top 5 million. Their investment yield will surge 55 percent if the figure exceeds 10 million.

"The funding (for Operation Chromite) was better than expected, and shows that crowdfunding can serve as a funding channel as well as an investment tool for retail investors," said Kim Yu-hun, a PR official at IBK Investment & Securities.

The new type of investment became available to individual investors earlier this year. According to data compiled by the Financial Services Commission, a total of 133 equity crowdfunding deals were launched in the first six months of its introduction, 64 of which succeeded in raising the targeted amount. The data also show that a total of 3,557 retail investors put up a combined 10.2 billion won for the deals.

Kim Eun-ki, an analyst at NH Investment & Securities, says that retail investors' interest in so-called alternative investments are growing due to low yields in conventional tools such as stocks and bonds.

"Many people are eager to generate even a small amount of money from their investment, and their journey to find alternatives will continue in the future," said Kim.