Delinquency Rates and Non-Performing Loan Sales Hit Consecutive Blows... P2P Shaking (Comprehensive)

Accused of Fraud
Anxiety Ahead of Institutional Entry Opportunity

[Asia Economy Reporter Kim Min-young] Peer-to-peer (P2P) financial companies are on edge amid a series of adverse developments. Recently, delinquency rates have been rising sharply, accompanied by news of large firms selling off non-performing loans. One company was reported to the Financial Supervisory Service on fraud charges. The industry, which had envisioned ‘institutional entry’ with the enforcement of related laws this August, is now concerned that investor sentiment may be weakening.

According to the Korea P2P Finance Association on the 20th, the average delinquency rate of 45 member companies as of the end of last month was 9.32%. This marks an increase of nearly 1 percentage point from 8.43% in December last year. Compared to the delinquency rate of 0.42% at the end of 2016, when P2P finance first emerged in Korea, this is more than a 22-fold rise.

In particular, red flags have been raised regarding the soundness of major companies. Terra Funding, the industry leader with cumulative loans of 1.0403 trillion KRW, saw its delinquency rate soar by 4.51 percentage points to 17.48% at the end of last month. During the same period, Honest Fund (with cumulative loans of 770.9 billion KRW) also saw its delinquency rate rise from 5.83% to 6.23%. As of the end of last month, the cumulative loan amount of member companies was 6.1243 trillion KRW, with these two companies (1.8112 trillion KRW) accounting for about 30% of the total.

[Image source=Yonhap News]

These companies mainly handled real estate project financing (PF) loans or mortgage loans, and the delinquency rate has increased as the real estate market has weakened. An industry insider said, “Due to the slowdown in real estate development and tightened loan regulations, the collateral value has declined or disputes have arisen in some projects, leading to an increase in delinquency rates.”

The companies explain that when delinquencies occur, they do not immediately sell off loan receivables but try to recover the principal through collection efforts, which causes new delinquencies to accumulate and thus raises the delinquency rate. An industry official said, “Generally, institutional financial companies maintain soundness by extending loans or decisively disposing of collateral through auctions or discounted sales of receivables based on certain criteria. However, P2P finance involves many investors individually investing in separate loans, making it difficult to use measures like loan extensions even for simple delays. Moreover, losses on receivables can lead to significant losses depending on investors’ portfolio composition, so it is difficult to easily sell off assets at a discount.”

News of large companies selling off non-performing loans is also cooling investor sentiment. Recently, Terra Funding recorded losses on three projects: a multi-family new construction product in Taean, Chungnam; a row house new construction product in Paju, Gyeonggi; and a multi-family new construction product in Goyang, Gyeonggi. The net loss, considering the existing returns paid to investors out of the principal of 10.2 billion KRW, was 2.39 billion KRW (loss rate 23.4%). This is the first time Terra Funding has sold off receivables.

8 Percent, which mainly handles personal credit P2P loans, reportedly recorded an average principal loss of 28% on the musical production crowdfunding product ‘The Musical 1~12.’

The news of a prosecution referral also shocked the industry. The Financial Supervisory Service reportedly detected fraud charges during an investigation of Pop Funding in December last year and requested a criminal investigation. The company’s cumulative loan amount is 498.4 billion KRW, with a delinquency rate reaching 64.80%.

The industry is anxious that the market might shrink ahead of the enforcement of the P2P Finance Act (Online Investment-Linked Finance Act) scheduled for August. An industry insider expressed concern, saying, “We worry that the market might be seen as a hotbed of bad loans even before it starts.” Another official predicted, “This opportunity will lead to a clear sorting out of bad companies.”

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