Loan Balances Decrease, Delinquency and Business Closure Reports Increase... P2P on the Brink

Loan Balance Decreases by 160 Billion Won, Delinquency Rate Rises by 1.92 Percentage Points
Fear of Business Closures Due to Financial Authorities' Sanctions and Registration Standard Shortfalls
Industry: "Investor Losses Ultimately Inevitable"

Illustration by Youngwoo Lee 20wo@

[Asia Economy Reporter Song Seung-seop] The exit of peer-to-peer (P2P) lending companies, which pool individuals' money to lend to people or businesses in need of funds, is expected to accelerate. This is because a large number of companies fail to meet the criteria for inclusion in the regulated financial sector, and financial authorities are strictly limiting interest rate regulations that exceed the legal maximum interest rate (24%), making a wave of closures a realistic possibility. While some view this as a necessary "sorting out" for the healthy growth of the market, concerns coexist that the scale of damage to investors who invested in companies being forced out could snowball.

Loan Balances Shrinking While Delinquency Rates Rise

Since the implementation of the On-Tu Law, loan balances have been shrinking and delinquency rates have surged. According to the Korea P2P Finance Association, as of the end of last month, the industry's average loan balance was approximately 1.3766 trillion KRW. This is about 162 billion KRW less compared to 1.5386 trillion KRW in the same period last year. After rapidly increasing from 1.0799 trillion KRW in December 2018 for a year, the trend has reversed to a decline.

On the other hand, delinquency rates have steadily increased. At the end of 2018, the industry's delinquency rate was 5.78%, rising to 8.43% one year later, and jumping to 10.35% by the end of last year. Among the 44 companies registered with the association, 12 had delinquency rates exceeding 30%, with the highest reaching 89%. Industry insiders argue that the situation could be even more severe when unregistered small P2P companies are taken into account.

Recently, the Financial Services Commission has reportedly begun a full review of sanctions imposed by the Financial Supervisory Service on six P2P companies. A Financial Services Commission official stated, "We are examining related regulations and violations," adding, "The final disciplinary measures will be decided at the regular meeting next month." Previously, the Financial Supervisory Service had approved heavy sanctions equivalent to 3 to 6 months of business suspension for six P2P companies whose combined platform fees and interest rates exceeded 24%.

Additionally, P2P companies must complete registration procedures under the On-Tu Law by August. They must meet capital requirements of 500 million KRW and various personnel and physical conditions. So far, only 5 out of approximately 240 companies have completed registration. The industry's forecast that many P2P companies may fail to meet the criteria is becoming a reality.

Industry: "If Wave of Closures Continues, Investor Losses Are Inevitable"

If the wave of closures continues, the damage will inevitably fall on investors, analysts say. Although regulations require that even if a company closes due to failure to meet registration requirements, the recovery of loan claims under existing loan and investment contracts must continue, investor losses are unavoidable. If companies suspend operations due to heavy sanctions or registration failures, or if worsening profits lead to employee departures and bankruptcies, the damage could spread to those who lent money.

An industry insider lamented, "If a business suspension occurs, borrowers might develop a moral hazard thinking 'I don't have to repay a failed company,'" adding, "This is a serious issue that could affect dozens or hundreds of companies in the future."