Financial Services Commission: "Secondary Financial Sector Should Avoid Halting New Loans"

Savings Banks, Specialized Credit Finance Companies, and Loan Companies Close New Loan Doors
Low-Income and Low-Credit Individuals at Risk of Being Driven to Illegal Private Loans
Financial Services Commission Secretary-General: "Secondary Financial Sector Must Continue to Serve as a Financial Window for Ordinary People Despite Difficulties"

On the 29th, as the COVID-19 pandemic continues to persist, illegal loan business card-type flyers from private loan companies are scattered across the Insadong street in Jongno-gu, Seoul. Photo by Mun Ho-nam munonam@

[Asia Economy Reporter Sim Nayoung] Financial authorities urged the secondary financial sector, which has recently reduced loans to middle- and low-credit borrowers, to "continue playing the role of the microfinance window despite difficult conditions," stating that "practices that shift all risk burdens to financial consumers due to changes in market conditions, such as stopping new loans citing risk management or profitability deterioration, should be avoided."

Lee Sehoon, Secretary General of the Financial Services Commission, emphasized on the 16th at the 'Microfinance Status Review Meeting' that "the active role of microfinance institutions such as savings banks, specialized credit finance companies, and loan companies in supporting microfinance is important." He added, "Recently, with the rise in market interest rates, the financial burden on low-income and vulnerable groups has increased, and financial accessibility has been shrinking," adding, "It is a time when proactive efforts from the entire financial sector are needed to alleviate the financial difficulties of the people."

The financial authorities' request not to reduce loan supply came as the secondary financial sector has been shrinking loans since the fourth quarter of last year, citing reasons such as the statutory maximum interest rate. This has raised concerns that financially vulnerable groups are being driven to illegal private loans.

Lee stated, "Since measures such as lowering the guarantee fees of the Korea Inclusive Finance Agency and raising handling interest rates in the financial sector have been implemented recently, more active cooperation from the financial sector is necessary," and "We plan to expand the supply of special guarantees for the lowest credit borrowers and launch new small emergency living expense loans to prevent vulnerable groups from being pushed into illegal private loans."

According to the household loan status by financial sector disclosed by the financial authorities, specialized credit finance companies saw household loans decrease by 1 trillion KRW in November last year compared to the previous month, and the decrease widened to 1.6 trillion KRW in December. Savings banks also saw household loans decrease by 100 billion KRW in November and by 500 billion KRW in December. The top 10 loan companies also reduced household loans by 63 billion KRW in November and 42.1 billion KRW in December last year.

Meanwhile, the Financial Services Commission evaluated that the supply scale of policy microfinance products has normalized since the beginning of the new year, after a decrease in supply during November and December last year.

The Financial Services Commission stated, "Despite the guarantees from the Korea Inclusive Finance Agency, some policy microfinance products such as the Worker’s Sunshine Loan have been reduced mainly by savings banks due to profitability deterioration caused by rising funding costs." However, since the new year, loan limits have been expanded and the handling interest rates of financial companies dealing with microfinance products have been raised by about 1 percentage point, showing a trend of increasing supply scale again.

The daily average supply amount of the microfinance loan product 'Worker’s Sunshine Loan' was only 10 billion KRW in December last year, but it increased to a daily average of 14.2 billion KRW by the 11th of the new year.

At the meeting, a review of the performance of policy microfinance fund supply was also conducted. The supply scale of policy microfinance last year recorded a provisional maximum of 9.8 trillion KRW, an increase of 1.1 trillion KRW compared to the previous year. The proportion of loans to middle- and low-credit borrowers by internet-only banks reached over 25% for all three companies (KakaoBank, K Bank, Toss Bank) as of the end of last year. Banks plan to raise this ratio above 30% by the end of this year.

The cumulative supply of mid-interest rate loans targeting middle- and low-credit borrowers reached 22.8 trillion KRW by the third quarter of last year, surpassing the previous year's annual supply of 21.6 trillion KRW.

On the other hand, the Saehopeum Holssi loan, supplied from banks' own funds, recorded a supply amount of 2.18 trillion KRW from January to November last year, falling short of the previous year's total supply of 3.17 trillion KRW.

Attendees at the microfinance status review meeting included officials from the Financial Services Commission, Financial Supervisory Service, Korea Inclusive Finance Agency, and financial associations related to microfinance.

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