[2020 National Audit] Credit Ratings Vary by Rating Agency... 18% Difference in Proportion of Grade 1

Reference image of bank loan counter (Source=Yonhap News)

[Asia Economy Reporter Kim Hyo-jin] It has been revealed that the credit ratings of bank loan customers vary significantly depending on the evaluation agency. There are calls for a more thorough examination of whether the ratings are being calculated fairly.

On the 23rd, Yoon Kwan-seok, chairman of the National Assembly's Political Affairs Committee and a member of the Democratic Party of Korea, confirmed through the Financial Supervisory Service the distribution status of credit ratings for bank loan customers from two leading domestic personal credit evaluation companies (CB companies). The proportion of grade 1 borrowers among unsecured loan customers showed a difference of 18.4%. For mortgage loan customers, the difference in the proportion of grade 1 borrowers was as much as 36.7%.

In the case of NICE Information Service, the proportion of grade 1 borrowers among bank loan customers recorded 40.2% at the end of September 2016 and steadily increased over five years to reach 48.1% at the end of September this year. The number of grade 1 customers increased by more than 800,000, from 2,264,509 to 3,108,320.

Despite little difference in the number of people evaluated, unlike NICE Information Service, whose proportion of grade 1 borrowers rose by 7.9 percentage points from 40.2% in 2016, KCB's proportion of grade 1 borrowers as of the end of September this year was 29.7%, which is 0.5 percentage points lower than at the end of December 2016. The number of grade 1 borrowers also increased relatively less, from 1,628,729 in 2016 to 1,848,609 this year, an increase of about 220,000.

For KCB, the proportion of high-grade customers with credit ratings of grade 3 or higher among unsecured loan borrowers was also 70.5% as of the end of September this year, 7.8 percentage points lower than NICE Information Service's 78.3%.

The difference in credit rating distribution was much larger for mortgage loan customers. NICE Information Service reported that the proportion of grade 1 borrowers was 52.9%, whereas KCB's was only 16.2%.

Regarding the proportion of high-grade customers with grade 3 or higher, NICE Information Service recorded 86.5%, while KCB was 75.3%, 11.1 percentage points lower. However, in the case of mortgage loans, the value of the collateral has a more decisive impact on loan screening than the borrower's credit rating.

Rep. Yoon said, "Since there is a significant difference in the credit evaluation results of CB companies, financial companies that refer to these results during loan screening need to exercise caution. Credit ratings are a 'power indicator' that strongly influences not only financial companies but also individual customers as they are reflected in loan screening results. Therefore, the financial authorities that authorize credit evaluation companies must closely examine whether the ratings are being calculated fairly."

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