Next Week Launch of 'Haetsalron Bank'... "Alleviating Burden on Common People vs Moral Hazard" (Comprehensive)

NongHyup, Industrial, Jeonbuk, and Gyeongnam Banks to Sequentially Launch New Products Within the Year
"A Stepping Stone for Bank Transactions" vs "Increased Burden on Banks"

'Haetsal Loan Bank' Launch One Week Away... Mixed Expectations and Concerns

[Asia Economy Reporter Lee Kwang-ho] As the launch of 'Haetsal Loan Bank,' involving 13 domestic banks, approaches in one week, expectations and concerns are mixed. There are optimistic views that it will ease the burden on low-income citizens struggling due to COVID-19 and serve as a 'stepping stone' for bank transactions. However, negative perspectives also exist, warning that it could lead to an increase in defaults due to a surge in debtors unable to repay loans and produce 'sunflowers' who only seek to exploit the benefits.

According to the financial sector on the 19th, NH Nonghyup, IBK Industrial Bank, Jeonbuk Bank, and BNK Gyeongnam Bank will launch Haetsal Loan Bank in the first phase on the 26th. Other banks will roll it out sequentially within the year.

The support targets are low-income and low-credit groups who have used policy-based financial products for over a year and have improved their debt and credit status. Eligibility includes those with an annual income of 35 million KRW or less, falling within the bottom 20% credit score bracket, and with an annual income of 45 million KRW or less. Loans will be provided up to a maximum limit of 20 million KRW, differentiated according to credit and debt improvement. The funds can be used without restrictions for purposes such as living expenses, and borrowers can choose between a 3-year or 5-year principal and interest installment repayment plan (with a grace period of up to 1 year). The Korea Inclusive Finance Agency provides a 90% guarantee, and Haetsal Loan Bank users must pay an annual guarantee fee of 2%.

Financial Services Commission Chairman Eun Sung-soo said at the 'Haetsal Loan Bank Business Agreement Ceremony' on the 1st, "Haetsal Loan Bank is a policy-based financial product designed to alleviate the financial difficulties of low-income and low-credit groups caused by the reduction of the maximum interest rate." He added, "Starting with the launch at the end of this month, we plan to operate a pilot period aiming to supply 300 billion KRW by the second half of this year."

Rapid Increase in Haetsal Loan 17 Subrogation Repayment Rate... Up 4.3%P in 6 Months

Contrary to government expectations, experts express growing concerns. Since loans can be obtained from banks by merely completing formal paperwork, it may encourage moral hazard and cause relative deprivation among those who repay their debts diligently. Particularly, the increased burden on banks in case of defaults is worrisome.

Due to the prolonged COVID-19 recession, the repayment ability of low-income citizens has declined, causing the subrogation repayment rate of Haetsal Loan 17, supported by the government, to rise rapidly. The subrogation repayment rate refers to the ratio of cases where the lending institution requests the guarantee agency, Korea Inclusive Finance Agency, to repay the debt on its behalf. Haetsal Loan 17 allows banks to request subrogation repayment from the Korea Inclusive Finance Agency after four instances of delinquency. Last year, the subrogation repayment rate rose from 1.3% in June to 5.6% in December, an increase of 4.3 percentage points in six months. This means that among 100 borrowers using Haetsal Loan 17, 6 failed to repay, and the guarantee agency covered their debts.

Professor Kim Sang-bong of Hansung University’s Department of Economics said, "Due to the prolonged COVID-19 pandemic, the subrogation repayment rate of policy-based financial products for low-income groups is bound to increase," advising, "Financial authorities need meticulous management to prevent and mitigate the rise in subrogation repayment rates."

Professor Sung Tae-yoon of Yonsei University’s Department of Economics pointed out, "Even if government funds are injected to reduce interest burdens, it should not proceed as if unrelated to repayment capability," adding, "Otherwise, it harms those who repay responsibly and increases the burden on banks."

A bank official said, "The intention to improve and protect low-income and low-credit groups from high loan interest rates is good, but risks such as defaults are inevitable," and added, "The conditions are strict, so we will have to see how many low-income and low-credit individuals actually benefit after the launch."

Financial Authorities Strengthen Support for Low-Credit Groups... Ongoing Management of Moral Hazard

Regarding this, a financial authority official explained, "Haetsal Loan Bank is a new policy-based financial product supplied by banks with a 90% guarantee from the Korea Inclusive Finance Agency. The guarantee agency conducts guarantee screening based on income, debt, and delinquency history to assess repayment ability, and banks bear 10% of the credit risk. Final loan approval will be decided through the banks' own screening."

He continued, "Considering that policy-based financial products target low-credit and low-income groups, a relatively high subrogation repayment rate is expected. Supply scale and guarantee fee rates are determined considering the anticipated subrogation repayment rate," emphasizing, "The government will strengthen financial support for low-income and low-credit groups while continuously managing moral hazard by conducting subrogation repayment screening through the Korea Inclusive Finance Agency and managing recourse claims against delinquent borrowers after subrogation repayment."

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