P2P Also Unstable... 'Sorting the Wheat from the Chaff' Begins in Earnest if Entering the Regulatory System Next Month

This Month's Delinquency Rate Soars to 16.91%
Some Companies Engage in 'Circular Financing'... Funding Consumers Suffer Losses
Following Private Equity, Financial Authorities Launch Intensive Inspections Amid Concerns of New Risks

[Asia Economy Reporter Kim Min-young] As financial authorities have announced a focused inspection on peer-to-peer (P2P) lending, concerns are growing that the soaring delinquency rates in the P2P industry could become a "detonation point" for financial instability. It is expected that the market will undergo a thorough sorting process once the Online Investment-Linked Finance Act (OnTu Act), which incorporates P2P companies into the regulatory framework, is enforced next month.

According to financial authorities and industry sources on the 3rd, the delinquency rate in P2P finance surged from 5.5% in 2017 to 10.9% in 2018, 11.4% at the end of last year, and 16.6% last month. This month, it has risen further to 16.91%.

Even ‘Terra Funding,’ the industry leader by cumulative loan amount, recorded a delinquency rate of 20.18% last month. This represents a 7.21 percentage point increase in just six months, raising concerns within the industry.

Terra Funding operates a real estate P2P finance business model that connects construction contractors with individual investors. Since the loan size per project reaches the 10 billion KRW range, any problem with a specific product can lead to significant losses. The company’s cumulative loan amount has reached 1.1292 trillion KRW.

Terra Funding explained that the delinquency rate rose due to defaults occurring in 15 project financing (PF) loans for construction funds. A company official stated, “The real estate market has deteriorated, and in order to minimize investor losses, we have adhered to the principle of conducting internal collections without selling off bonds as much as possible, which has contributed to the higher delinquency rate.”

P2P finance is a fintech (finance + technology) service that connects borrowers and investors through an online platform without going through financial institutions. It was introduced in South Korea in 2015 and has grown rapidly since then.

However, recently, alongside the sharp rise in delinquency rates, financial consumer damages have occurred repeatedly due to some companies’ unsound business practices. ‘Pop Funding’ is a representative case. Pop Funding has handled movable collateral loans by collecting funds from investors secured by inventory assets of small and medium-sized enterprises such as home shopping or open market sellers. Due to delays in principal repayments by borrowers, 35.5 billion KRW worth of private equity funds linked to this product have suspended redemptions. Pop Funding was once cited by the Financial Services Commission as a model case of innovative finance. Currently, it is under prosecution investigation for allegations including ‘circular financing.’

Because of the nature of P2P finance transactions, if the borrower fails to repay on time, losses inevitably fall entirely on investors, raising concerns that it could become another trigger for financial instability following private equity funds.

Ultimately, financial authorities have taken action. The day before, they announced that alongside a full-scale investigation of private equity funds, they will conduct focused inspections on all P2P companies around the enforcement date of the Online Investment-Linked Finance Act on the 27th of next month.

Earlier last month, financial authorities issued a P2P investment advisory warning, citing companies that guarantee principal, lure investors with excessive rewards and high returns, or excessively lend to specific borrowers. This is the second warning issued this year. The authorities stated, “We plan to analyze audit reports from accounting firms on P2P companies’ loan receivables and conduct registration reviews only for qualified companies, while guiding unqualified companies to convert to loan businesses or close down.”

Some expect that with the enforcement of the OnTu Act next month, as P2P enters the regulatory system, poor-performing companies will be exposed, and a thorough sorting process will begin. The enforcement decree specifies that P2P companies’ real estate-related loan limits must be ‘within 7% of total loan assets’ or ‘70 billion KRW or less.’ Meanwhile, there are currently 241 P2P companies operating domestically, with cumulative loans reaching 10.3251 trillion KRW as of last month.

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