Soaring Microfinance Delinquency Rates... Red Flag for COVID-Vulnerable Groups' Defaults

Microfinance Delinquency Rate at 4.9%... Up 0.5 Percentage Points Compared to Year-End
Delinquency Rate Surges Mainly in COVID-19 Vulnerable Sectors
Seogeumwon's Substitute Repayment Rate Also Increases

[Asia Economy Reporter Song Seung-seop] The delinquency rate of 'Miso Finance,' which targets low-income and low-credit individuals, has begun to soar. Although loans were provided at relatively low interest rates, the number of ordinary people unable to repay on time has increased, indicating that the debt burden felt by vulnerable groups is much greater than expected. As the number of people turning to Miso Finance during the COVID-19 pandemic reached an all-time high, concerns are rising that the financial distress of vulnerable groups is imminent.

According to data submitted by the Korea Inclusive Finance Agency to Representative Yoon Doo-hyun's office on the 15th, the overall delinquency rate of Miso Finance products stood at 4.9% as of April. This marks a 0.5 percentage point increase from 4.4% at the end of last year within a few months. The average delinquency rate of Miso Finance, which had been managed around 4.5% since 2016, has surged this year, approaching the 5% threshold.

Miso Finance is a type of loan program for ordinary people characterized by unsecured, non-guaranteed, and small loans. It targets financially marginalized groups who find it difficult to use formal financial institutions. Typically, the target includes those in the bottom 20% of credit scores, basic livelihood security recipients and near-poverty groups, and those eligible for the Earned Income Tax Credit. The Korea Inclusive Finance Agency operates 16 Miso Finance products.

The delinquency rate indicator began to rise mainly in COVID-19 vulnerable industries. The delinquency rate for Miso Finance in the food service industry was 7.4% in April, up 0.8 percentage points from 6.6% at the end of last year. The food service sector accounts for 19-20% of total Miso Finance loans. During the same period, the retail industry’s delinquency rate, which had been declining, jumped from 5.7% to 6.5%. Delinquency rates also rose across the board in construction (5.5% to 6.3%) and service industries (4.1% to 4.6%).

The trend is similar when examined by loan purpose. Miso Finance products related to startup funds had a high delinquency rate between 7-8% in the first half of last year but dropped to 6.0% in December. However, this year, the delinquency rate rose again to 6.6%. The delinquency rate for Miso Finance used for facility improvement funds fell to 7.6% in December last year after a downward trend but has surged back to 9.3%.

Loan Forbearance Not Yet Over... Subrogation Repayment Rate Also Surges

The number of vulnerable groups turning to Miso Finance due to COVID-19 has also increased. Last year, the number of Miso Finance loans was 31,951, up 2,495 from 29,456 the previous year. This is the highest level since 2016. During this period, the loan amount also increased by 28.6 billion KRW, from 306 billion KRW to 334.6 billion KRW. As the total loan volume grew, the number of those unable to repay properly also increased accordingly.

Considering that various loan repayment forbearance measures are in place, the situation is interpreted as more serious. In April last year, financial authorities introduced policies for loan maturity extensions and interest payment deferrals in response to the COVID-19 situation. At that time, some delinquency indicators improved in the second half of last year as vulnerable borrowers received relief. However, as COVID-19 lasted longer than expected and economic recovery slowed, the number of people struggling to pay interest surged again. There are warnings that if the forbearance measures end as scheduled at the end of September, the 'vulnerable group’s financial distress,' the weak link in household debt, could become a reality.

Ultimately, the view that the Korea Inclusive Finance Agency, which lends money at low interest rates to low-credit borrowers, will have to repay the loans on their behalf is gaining traction. The subrogation repayment rate for the Worker’s Sunshine Loan at the end of last year was 10.5%, the highest ever. The subrogation repayment rate refers to the proportion of the total loan amount that the guarantee institution must repay on behalf of the borrower. This means that if a vulnerable borrower borrows 10 million KRW, the Korea Inclusive Finance Agency repaid 1 million KRW on their behalf. The subrogation repayment rate for the Sunshine Loan17, guaranteed by the Korea Inclusive Finance Agency, also rose from 0.2% in the first half of last year to 5% by the end of the year.

Representative Yoon Doo-hyun emphasized, "The weakest link of vulnerable groups is in jeopardy," and added, "There is a need for more detailed policy support."

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