P2P Loan Delinquency Rate 'Warning'... "Could Undermine Financial Stability"

P2P Association's 45 Member Companies Record an Average of 8.43%
Some Mortgage Loan Demand Seen Moving to P2P
Risk Management Lacking, Close Monitoring Needed

[Asia Economy Reporter Kim Min-young] The delinquency rate for peer-to-peer (P2P) loans has risen again above 8%, marking a return to an upward trend. The overall P2P loan delinquency rate increased due to a sharp rise in delinquency rates among some major P2P companies. As the P2P market grows rapidly, rising delinquency rates are being pointed out as a factor that could undermine financial stability.

According to the Korea P2P Finance Association on the 28th, the average delinquency rate among 45 member companies stood at 8.43% as of December last year. After recording 9.11% in August last year, the rate had been declining but has now reversed to an increase. The P2P delinquency rate was 6.79% in January last year, rose to 9.11% in August, then fell to 8.08% in October and 7.89% in November. A financial sector official explained, “Some P2P companies failed to properly manage risks, such as suspending operations while having high delinquency rates, which caused the delinquency rate to rise.” Companies mainly handling real estate project financing (PF) loans were also cited as having higher delinquency rates due to delayed repayments amid the real estate market downturn.

P2P loans are a business model where an unspecified number of investors lend money to borrowers through an online platform and receive a certain interest. After the P2P company reviews the borrower's loan application considering credit ratings, the loan product is publicly offered, and investors purchase the principal and interest receivables (loan claims) of this product. Once all investment funds are collected from investors, the funds are supplied to the borrower.

Here, the delinquency rate refers to the proportion of the remaining principal of loans currently delinquent among the outstanding loan balances.

The annual delinquency rate has been sharply increasing every year. When P2P loans were first introduced in Korea in December 2016, the delinquency rate was 0.42%, but it rose to 3.95% in December 2017 and 5.78% in December 2018. During the same period, the cumulative loan amount (based on association member companies) surged 12.5 times from 468.2 billion KRW to 5.8674 trillion KRW.

There are also signs that some demand for mortgage loans has shifted to P2P loans due to real estate loan regulations. The increase in individual real estate secured loans between November (804.4 billion KRW) and December (862.4 billion KRW) last year, before and after the implementation of the December 16 loan regulations, was about 58 billion KRW. This was approximately 10 billion KRW more than the monthly average increase of 44 billion KRW from June to November last year.

However, the industry draws a line by stating that most real estate loans are used to repay existing loans from secondary financial institutions and loan companies. An industry official said, “99% of real estate secured loans are refinancing loans that replace existing high-interest loans with P2P loans,” adding, “We are closely monitoring transaction statuses by company to ensure that P2P loans do not become a regulatory blind spot.”

Meanwhile, the Online Investment-Linked Finance Business Act (P2P Finance Act) was passed by the National Assembly last year and is set to be enforced in August. The Financial Services Commission announced the draft enforcement decree of the P2P Finance Act yesterday, which includes setting a general individual investor investment limit of 50 million KRW and a 30 million KRW limit for investments in real estate-related products. The limit for P2P companies lending to the same borrower was capped at 7 billion KRW to prevent concentration in real estate PF loans. According to the Financial Services Commission, as of the end of last year, there were 239 registered P2P companies with outstanding loans totaling 2.38 trillion KRW, of which 66% were real estate-related loans.

This content was produced with the assistance of AI translation services.