Sunshine Loan Funding Interest Rates Rise for 4 Months... Low Credit and Low Income Borrowers Face Hardship (Comprehensive)

Sunshine Loan Procurement Interest Rate 2.04%... Rising for 4 Consecutive Months
Inevitable Impact on Low-Credit, Low-Income Financially Vulnerable Groups
'Subrogation Repayment Rate' by Institutions Also Rising Sharply

Illustration by Youngwoo Lee 20wo@

[Asia Economy Reporter Song Seung-seop] The procurement 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 increased, but they are faced with the situation of having to take out loans at relatively higher interest rates.

Haetsal Loan Procurement Interest Rate Rises for 4 Consecutive Months

According to the Korea Federation of Savings Banks as of the 19th, the procurement interest rate of savings banks handling Haetsal Loan was 2.04%, up 0.08 percentage points from the previous month. Since the interest rate was the lowest at 1.67% in October last year when statistics began, it has steadily increased every month. It rose to 1.82% in one month and increased by a total of 0.37 percentage points over four months.

The loan interest rate is determined by adding various additional interest rates such as credit cost, product profit, and preferential interest rates to the base rate. The rise in procurement interest rates means that the cost of raising capital has increased accordingly. Unless the industry absorbs losses, if the procurement interest rate rises, the overall interest rate of Haetsal Loan products inevitably increases as well.

Industry insiders explained that it is difficult to disclose the interest rate status by product specifically, but it is true that it has followed the procurement interest rate. A representative of a savings bank handling Haetsal Loan said, "Haetsal Loan is a policy financial product with an interest rate ceiling, so the fluctuation is not large," but added, "In the past 5 to 6 months, the interest rate of Haetsal Loan products has increased by 0.1 to 0.2% every month." Another savings bank also confirmed that the interest rate of 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 procurement 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, and the deposit interest rates of savings banks have steadily risen since August. The rate, which was 1.64%, rose monthly for four months to 1.91%, similar to the procurement interest rate of Haetsal Loan.

However, from the industry's perspective, the increase in deposit interest rates was inevitable. Since this year, savings banks had to lower their loan-to-deposit ratio from 110% to 100%, so they needed to gather deposits by raising deposit interest rates from the first half of last year. There was also an aspect of trying to retain deposits that were flowing into the stock market amid the 'Yeongkkeul' (borrowing to the limit for investment) phenomenon.

If the Interest Rate Hike Trend Continues, Financially Vulnerable Groups Will Inevitably Be Hit

Nevertheless, 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 amount also increased by 273.6 billion KRW, from 1.133 trillion KRW to 1.4066 trillion KRW.

Moreover, from this month, the support requirements for Haetsal Loan for special employment workers (teukso) and freelancers have been relaxed, so the number of applicants is expected to increase further. The government, considering the unstable income flow of these groups, extended the income verification period from 2 months to 6 months through the '2021 Economic Policy Direction' announced in December last year. If stable income verification is difficult, a path has also been opened to use microfinance small loans through industry-specific organizations.

The subrogation repayment rate, where institutions repay on behalf of borrowers who fail to repay Haetsal Loan, is also rising sharply. The overlap of increased demand for Haetsal Loan and the interest rate hike trend raises concerns that the scale of delinquency may grow, especially among vulnerable groups with reduced debt repayment ability.

According to data received by Representative Hong Sung-guk of the Democratic Party from the Korea Inclusive Finance Agency, the subrogation repayment rate for 'Haetsal Loan 17,' which lends money at an annual 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.