[In-Depth Look] Anticipating Sustainable Financial Services for the Common People

Jaeyeon Lee, Senior Research Fellow at the Korea Institute of Finance.

At the end of last year, the government, together with the financial sector, announced a plan to secure policy-based low-income financial guarantee funds amounting to 390 billion KRW annually, to be borne over the next five years. This is the third such guarantee fund securing plan since 2010, which includes changes to the contributors and system of the existing plan, the scale of contributions, and an extension for the next five years. Regarding contributors, while previously limited to mutual finance institutions such as Nonghyup, Shinhan Credit Union, Saemaeul Geumgo, and savings banks, the revised plan expands this to the entire financial sector handling household loans, including banks, insurance companies, and specialized credit finance companies (yeojeonsa).

The policy-based low-income finance supported by the government in Korea began to be actively introduced after the 2008 global financial crisis. At that time, the government introduced the Sunshine Loan (Haetsal Loan) in 2010 to address the gap caused by a surge in demand for low-income finance due to the rising proportion of low-income households, which the market supply could not meet. The Sunshine Loan, utilizing policy-based low-income finance guarantees, is provided at an interest rate of about 10% without collateral, significantly contributing to meeting the financial needs of low-income individuals with low income or credit ratings, especially those lacking real estate collateral and thus having difficulty accessing institutional financial services. It is estimated that approximately 18 trillion KRW worth of Sunshine Loans have been supplied, averaging about 2 trillion KRW annually.

While low-income finance has quantitatively expanded significantly through the use of policy-based low-income finance such as the Sunshine Loan, there is considerable room for qualitative development, as these loans cannot be provided without guarantees. Most low-income individuals, due to low income and assets, inevitably require external funds from financial institutions for unexpected expenses such as medical bills or ceremonial costs. However, since the 1997 International Monetary Fund (IMF) foreign exchange crisis, financial institutions have focused on soundness and transparency supervision, resulting in loans primarily secured by real estate collateral valued at 100% of the loan amount. Mutual finance institutions, although primarily serving their members, also have over 90% of their loans secured by real estate collateral, and savings banks, while having a high proportion of unsecured loans, mostly provide high-interest loans at the legal maximum interest rate.

Accordingly, the Sunshine Loan, initially introduced temporarily in 2010 with the expectation that low-income financial institutions would fulfill their original roles, was extended in 2015 and re-extended in 2020. Currently, policy-based low-income finance such as the Sunshine Loan mainly supports unsecured credit loans for low-income individuals.

Therefore, at this point where quantitative expansion through policy-based low-income finance has been somewhat achieved, the challenge facing low-income finance is to enhance sustainability through qualitative changes. To this end, it is necessary to gradually reduce the direct role of large banks, which are not suitable for handling low-income finance due to its characteristics, while establishing the role of low-income financial institutions and enhancing their capabilities as well as the supervisory capacity of financial authorities.

Going forward, low-income financial institutions should strengthen their loan screening and management capabilities so that they are recognized not merely as places sought when low-interest bank funds are unavailable, but as institutions where loans are made considering the characteristics of low-income individuals. Financial authorities should actively support these efforts.

Additionally, financial authorities need to supervise the soundness of low-income financial institutions more meticulously, but rather than uniform supervision focused excessively on soundness and transparency, they should strive to develop the capacity to supervise differentially, considering the characteristics of low-income finance. Through this, it is hoped that low-income financial institutions will soon fulfill their original roles, and policy-based low-income finance will share roles with these institutions to support more vulnerable low-income individuals, thereby establishing sustainable low-income finance in Korea.

Jae-Yeon Lee, Senior Research Fellow, Korea Institute of Finance.