Low-credit borrowers struggling with financial difficulties turn to Haetsalron as interest rates 'wriggle'

Haetsallon Procurement Interest Rate 2.04%... Rising for 4 Consecutive Months
Unavoidable Impact on Low-Credit and Low-Income Financially Vulnerable Groups

Illustration by Youngwoo Lee 20wo@

[Asia Economy Reporter Song Seung-seop] The funding interest rate for the policy-based low-income financial product, Haetsal Loan, continues to show an upward trend. As the financial difficulties of low-income people worsened due to COVID-19, the number of financially vulnerable groups seeking Haetsal Loan has increased, but they are faced with the situation of having to take out loans at relatively higher interest rates.

According to the Korea Federation of Savings Banks as of the 19th, the funding interest rate for savings banks handling Haetsal Loan was 2.04%, up 0.08 percentage points from the previous month. Since the statistics began, the rate has steadily risen every month from the lowest point of 1.67% in October last year, increasing by 0.37 percentage points over four months.

Loan interest rates are determined by adding various additional interest rates such as credit cost, product profit, and preferential interest rates to the base rate. An increase in the funding interest rate means that the cost of raising capital has increased accordingly. Unless the industry absorbs the loss, when the funding interest rate rises, the overall interest rate on Haetsal Loan products inevitably increases as well.

Industry insiders explained that it is difficult to disclose the specific interest rate status by product, but it is true that the rates have moved in line with the funding interest rate. A representative from a savings bank handling Haetsal Loan said, "Haetsal Loan is a policy financial product with an interest rate ceiling, so the fluctuation range is not large," but added, "Over the past 5 to 6 months, the interest rate on Haetsal Loan products has increased by 0.1 to 0.2% each month." Another savings bank also confirmed that the interest rate on Haetsal Loan products rose by more than 0.3 percentage points from October to January.

This is largely due to the increase in savings banks' deposit interest rates. Unlike commercial banks, savings banks cannot issue financial bonds, so their funding interest rates are determined according to fixed deposit interest rates. Typically, they are influenced by one-year fixed deposits from 2 to 3 months prior, which rose continuously from 1.64% in August to 1.91%. There is also an analysis that the industry's need to meet the loan-to-deposit ratio, which was lowered to 100% starting this year, led to an increase in deposit interest rates to boost deposit amounts, thereby pushing up the funding interest rate as well.

If the interest rate hike trend continues, financially vulnerable groups will inevitably be hit

If this trend continues, low-credit and low-income individuals are expected to be inevitably affected. Currently, the number of financially vulnerable groups applying for Haetsal Loan is rapidly increasing due to the COVID-19 situation. According to the Korea Inclusive Finance Agency, the number of Haetsal Loan supply cases in the fourth quarter of last year was 146,859, an increase of 15,268 cases compared to the previous quarter. During the same period, the scale also increased by 273.6 billion KRW, from 1.133 trillion KRW to 1.4066 trillion KRW.

Moreover, starting this month, the support requirements for Haetsal Loan for special employment workers (teukso) and freelancers have been relaxed, and the number of applicants is expected to increase further. The government extended the income instability verification period from 2 months to 6 months in December last year through the ‘2021 Economic Policy Direction.’

The subrogation repayment rate, where institutions repay on behalf of borrowers who fail to repay Haetsal Loan, is also rising sharply. Concerns are emerging that the scale of defaults may increase, especially among vulnerable groups with reduced debt repayment ability, as the demand for Haetsal Loan increases and the interest rate hike trend overlaps.

According to data received by Hong Sung-guk, a member of the Democratic Party of Korea, from the Korea Inclusive Finance Agency, the subrogation repayment rate for ‘Haetsal Loan 17,’ which lends money at an annual interest rate of 17.9%, jumped from 4.2% in October to 5.6% in two months. The ‘Haetsal Loan Youth’ product for borrowers aged 34 and under also rose from 0.07% to 0.2% during the same period.

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