Banks Cannot Reject COVID Loans... Reflecting Credit Bureau Ratings When Lending (Comprehensive)

Banks Have Used Their Own Credit Ratings
Small Business Owners Face Reduced or Denied Loan Limits
From the 8th, External CB Company Ratings Will Be Compared and Applied

On the 6th, a small business owner visited the Woori Bank headquarters in Jung-gu, Seoul, to receive consultation as the 'Seoul City Livelihood Innovation Finance Dedicated Window' began operations to support small and medium-sized enterprises and small business owners affected by the impact of COVID-19. Photo by Hyunmin Kim kimhyun81@

[Asia Economy Reporter Kwon Haeyoung] Starting from the 8th, banks will use the more favorable credit rating between their own internal credit rating and the external credit rating from credit bureaus (CB) when providing the annual 1.5% ultra-low interest rate secondary loan support to micro and small business owners. This is expected to facilitate smoother funding for small business owners who urgently need funds due to damages caused by the spread of the novel coronavirus infection (COVID-19) but had to turn away due to high bank thresholds.

According to the financial sector, on the afternoon of the 7th, the Financial Services Commission sent an official letter to banks ordering that micro and small business owners who meet grades 1 to 3 based on the external CB credit rating should be supplied with the ultra-low interest rate secondary loan support even if they fall short of the bank’s internally calculated credit rating. The external CB rating was unified to NICE Credit Rating standards.

A Financial Services Commission official stated, "There have been cases where loans were possible based on the external CB credit rating but were rejected or had reduced limits because the internal bank credit rating was insufficient," adding, "We requested this to unify the varying credit rating standards across banks to reduce confusion and expand financial support for small business owners."

From this month, commercial banks will supply a total of 3.5 trillion KRW worth of ultra-low interest rate secondary loan support. Loans of up to 30 million KRW are provided to micro and small business owners at an annual interest rate of 1.5%. Following the Financial Services Commission’s recommendation, banks must execute loans from this day forward to small business owners who meet grades 1 to 3 based on NICE Credit Rating standards regardless of their internal credit rating. Even if the CB rating is below grade 3, loans can be granted if the bank’s internal credit rating meets the criteria. This effectively lowers the bank loan threshold for small business owners affected by COVID-19.

Until now, there have been numerous complaints from small business owners at bank branches regarding the ultra-low interest rate secondary loan support. Although the government announced that borrowers with credit ratings from 1 to 3 are eligible, it was unclear which institution’s standards applied. Many cases occurred where borrowers checked their CB credit rating and found it to be grade 3, visited the bank loan counter, but were rejected because the bank’s internal standard rated them below grade 4. Banks calculate their own credit ratings based on accumulated financial transaction history in addition to CB evaluations, so internal ratings often differ from CB ratings. For non-primary customers, the bank’s internal credit rating is generally lower than the CB rating.

Whether a loan is possible can also vary depending on which bank is approached. Looking at the credit rating requirements for the ultra-low interest rate secondary loan support, there are differences among banks. KB Kookmin Bank uses grades 1 to 3 out of 13 total grades, Woori Bank uses grades 1 to 3 out of 10 grades as the standard. Shinhan Bank targets those with BBB+ or higher, which corresponds to grade 8 or above out of 21 total grades. Hana Bank and NH Nonghyup Bank both base their criteria on CB credit ratings of grades 1 to 3, but internally Hana Bank supplies loans to grades 1 to 5 out of 15 total grades, and Nonghyup Bank to grades 1 to 5 out of 10 grades.

Because loan criteria differ by bank, there were also significant differences in loan performance among banks in the early days of the ultra-low interest rate secondary loan support launch. From the 1st to the 3rd of this month, the total approved loan amount based on KB Kookmin, Shinhan, Hana, Woori, and Nonghyup Banks was 125.9 billion KRW. Among these, Nonghyup Bank accounted for the largest portion with 50 billion KRW, followed by Shinhan Bank (38 billion KRW), Woori Bank (16.6 billion KRW), KB Kookmin Bank (16 billion KRW), and Hana Bank (5.3 billion KRW).

However, some voices have raised concerns that since loan limits are fixed, this could lead to reverse discrimination against primary customers, and borrowers who fall below the internal credit rating after the one-year maturity and interest rate recalculation could face disadvantages.

A bank official said, "The ultra-low interest rate secondary loan support from commercial banks has a short maturity of one year, but when the maturity comes and interest rates are recalculated, borrowers who do not meet the bank’s internal standards may face higher interest rates," adding, "The bank’s internal credit evaluation model is much more sophisticated, so applying external CB standards could increase the risk of defaults."

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