COVID-19 Vulnerable Groups Flock to Microfinance... Delinquency Rates Begin to Soar (Comprehensive)

Microfinance Delinquency Rate at 4.9%... Up 0.5 Percentage Points from 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,' targeting low-income and low-credit individuals, has begun to soar. Despite relatively low interest rates and the implementation of grace policies by financial authorities, the number of ordinary people unable to repay their loans on time has increased. This indicates that the debt burden felt by vulnerable groups due to COVID-19 was much greater than expected. As the number of people turning to Miso Finance reached an all-time high, concerns have been raised that defaults centered on vulnerable groups are 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, nearing the 5% threshold.

Microfinance products provided by Seogeumwon. Photo by Seomin Geumyung Jinheungwon

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, those with credit scores in the bottom 20%, basic livelihood security recipients, near-poverty groups, and those eligible for the Earned Income Tax Credit are eligible. 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 industry accounts for 19-20% of total Miso Finance loans. During the same period, the retail sector's delinquency rate, which had been declining, jumped from 5.7% to 6.5%. Delinquency rates in construction (5.5→6.3%) and service industries (4.1→4.6%) also rose simultaneously.

The trend is similar when looking at loan purposes. Miso Finance products for startup funds had high delinquency rates 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 and other purposes declined last year, falling to 7.6% in December, but has since surged to 9.3%.

Loan grace period not over yet... Subrogation repayment rate also surges

A store in Mapo-gu, Seoul, closed due to social distancing measures amid the spread of COVID-19. Photo by Kang Jin-hyung

The number of vulnerable groups turning to Miso Finance increased due to COVID-19. 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. While the total loan volume expanded, the number of those unable to repay properly also increased accordingly.

Considering that various loan repayment grace policies are in effect, the situation is interpreted as more serious. In April last year, financial authorities introduced loan maturity extensions and interest repayment deferrals for small and medium enterprises and small business owners in light of COVID-19. When two additional extension measures were taken, those who had benefited from the extensions and deferrals were allowed to reapply according to their loan maturity dates.

At that time, the breathing room for vulnerable borrowers improved, and some delinquency indicators improved in the second half of last year. The delinquency rate, which was 6.2% in April last year, dropped to 4.4% in December. However, as COVID-19 lasted longer than expected and economic recovery slowed, the number of people struggling to pay interest surged again. If the grace measures end as scheduled at the end of September, warnings suggest that 'vulnerable group defaults' could become a reality.

Moreover, the delinquency rate is a kind of lagging economic indicator. It means that delinquency rates spike after a full-scale economic crisis begins. Generally, during a recession, loan amounts increase faster than delinquent amounts. However, when policy financial support ends, the repayment capacity of defaulting borrowers declines, causing delinquency rates to rise as well. Even if the current delinquency rate is within a manageable range, complacency is not warranted.

Illustration by Youngwoo Lee 20wo@

Ultimately, the view that the Korea Inclusive Finance Agency is repaying loans on behalf of low-credit borrowers who borrowed at cheap interest rates is gaining traction. At the end of last year, the subrogation repayment rate for the Worker’s Sunshine Loan was 10.5%, the highest ever. The subrogation repayment rate refers to the proportion of total loans that the guarantee institution must repay on behalf of borrowers. This means that if a vulnerable borrower borrowed 10 million KRW, the agency repaid 1 million KRW on their behalf. The subrogation repayment rate for the Sunshine Loan 17, which the agency guarantees, also rose from 0.2% in the first half of last year to 5% by year-end.

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

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