In the Second Half of the Year, Haetsalron17 Interest Rate Reduced by 2%P to 15.9%... "Additional Reductions Under Review"

Financial Services Commission Announces 'Policy for Reforming the Supply System of Financial Services for Low-Income Citizens'

Key Contents. Source: Financial Services Commission

[Asia Economy Reporter Park Sun-mi] Financial authorities will temporarily provide refinancing products for loans exceeding 20% interest rates to minimize side effects following the reduction of the legal maximum interest rate (from 24% to 20%). Additionally, the interest rate for 햇살론17 (Haetsalron17) will be lowered by 2 percentage points, and the support requirements for debt adjustment borrowers with good repayment records will be relaxed.

On the 30th, the Financial Services Commission announced the "Policy for Reforming the Supply System of Policy-Based Microfinance" as the first follow-up measure after the legal maximum interest rate reduction.

First, to compensate for the ‘reduction in credit loans for low-credit borrowers’ caused by the maximum interest rate cut, the policy-based microfinance safety net will be significantly expanded. For those who have repayment ability but find it difficult to reuse loans when existing high-interest loans mature, a refinancing product called 'Safety Net Loan II' will be supported from the second half of the year with a limit of 300 billion KRW. Eligible individuals are low-income and low-credit borrowers (annual income of 35 million KRW or less, or annual income of 45 million KRW or less with a personal credit score in the bottom 20%) who have been using high-interest loans exceeding 20% per annum for more than one year before the maximum interest rate reduction date or whose loans are due within six months and are currently repaying normally.

After undergoing special guarantee procedures at the Microfinance Integrated Support Center, loans can be obtained from banks. Interest rates below 20% will be applied, but since this is a replacement product for existing high-interest loans, a certain level of interest rate will be applied. The loan limit and period will be up to 20 million KRW within the confirmed balance range for high-interest refinancing, with equal principal and interest repayments over 3 to 5 years.

Expansion of Interest Rate Incentives... Annual Interest Rate Reduction Increased by 0.5 Percentage Points

Reflecting the interest rate reduction due to the maximum interest rate cut, the interest rate for 햇살론17 will also be lowered by 2 percentage points to 15.9% starting in the second half of the year, and its name will be changed to 햇살론15 (Haetsalron15). The Financial Services Commission plans to consider further interest rate reductions depending on market conditions.

Interest rate incentives to strengthen the motivation for faithful repayment will also be expanded. Until now, for 3-year maturity loans, a 2.5 percentage point annual interest rate reduction incentive was provided for faithful repayment, and for 5-year maturity loans, a 1 percentage point annual reduction was given. Going forward, to strengthen the incentive for normal repayment, the annual interest rate reduction will be increased by 0.5 percentage points each year for faithful repayment.

Furthermore, the supply of 햇살론 유스 (Haetsalron Youth) to support young people who have difficulty accessing formal financial institutions will be significantly expanded from the planned 140 billion KRW this year to 240 billion KRW. A special support program has been introduced to provide a lump sum of 5 million KRW to new users to respond to urgent funding needs. In addition, the support requirements for debt adjustment borrowers with good repayment records will be relaxed. Currently, those undergoing debt adjustment procedures (personal rehabilitation or personal workout) must have no arrears for 9 months (9 times) to use policy-based microfinance products, but this will be eased to 6 months.

Expansion of Policy-Based Microfinance Contributions to All Financial Sectors Handling Household Loans

The system will be reformed to expand the financial sectors contributing to policy-based microfinance, which has been temporarily funded. The contributors, previously limited to mutual finance and savings banks, will be expanded to all financial sectors handling household loans, including banks, insurance companies, and credit finance companies. When financial companies handle microfinance guaranteed loans, a guarantee usage contribution system will be introduced, requiring them to bear a certain percentage of the guarantee balance as a fee for using the guarantee.

The Financial Services Commission recognizes that even after supporting policy-based microfinance, problems persist where borrowers fail to cross the threshold to banks and repeatedly use high-interest loans from secondary financial institutions. Therefore, it is currently negotiating with the banking industry to launch new policy-based microfinance products in the second half of the year. Eligible individuals are low-income earners with an annual income of 35 million KRW or less who have used policy-based microfinance products for more than one year and whose debt or credit has improved. Interest rates are expected to be set lower than those of Worker Haetsalron (8.48%), New Hope Loan (7.01%), and Sa-itdol (6.72%). Loans of up to 20 million KRW will be available with equal principal and interest repayments over 5 years.

Haetsalron Card to be Launched in the Second Half of the Year

A new policy-based microfinance product for the credit finance sector, such as the Haetsalron Card, will also be launched in the second half of the year. This reflects the issue that low-credit and low-income vulnerable groups have difficulty obtaining credit cards and are excluded from benefits such as installment payments and points. Support will be provided to allow new credit card use if the applicant completes credit management education and meets minimum repayment ability, with a usage limit capped at 2 million KRW. Use of card loans (cash advances, card loans) and seven major industries such as entertainment bars and gambling businesses will be restricted. However, discounts on billing amounts and interest-free installments based on usage amounts will be available.

This reform plan reflects the recent rapid changes in the environment surrounding policy-based microfinance. Starting in July, the legal maximum interest rate will be lowered from the existing 24% to 20% to alleviate the high-interest burden on low-income individuals, and there has been growing demand for supplementary measures to minimize side effects such as the contraction of loans for low-credit borrowers due to the maximum interest rate reduction.

A Financial Services Commission official stated, "We have comprehensively improved the supply system to respond to new environmental changes such as the maximum interest rate reduction and to enhance the effectiveness of policy-based microfinance," adding, "We also plan to significantly improve the operational system to enhance the effectiveness of policy-based microfinance through linkage with welfare, employment, and debt adjustment services, as well as strengthening financial education."

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