[Opinion] The Need to Strengthen Credit Evaluation Services for Self-Employed Workers

Seo Ji-yong, Professor, Department of Business Administration, Sangmyung University

Recently, household debt has surged rapidly, leading the government to strengthen loan regulations. The loan growth rate for this year is expected to be managed within 6% compared to the previous year. Furthermore, measures to curb loan supply are anticipated to tighten the Debt Service Ratio (DSR) regulations even more. DSR is an indicator calculated by dividing the borrower's total loan principal and interest repayment amount by their annual income. Financial authorities have decided to apply DSR regulations to non-member credit loans from credit card companies starting this July, and to card loans next year.

The recent series of loan regulations are interpreted as risk management measures in response to the rapid increase in loan supply such as card loans due to the impact of COVID-19. However, loans to self-employed individuals affected by COVID-19 have been excluded from the total volume regulation. Nevertheless, many individual business owners who find it difficult to prove direct damage from COVID-19 are expected to face reduced loan amounts or increased loan interest rates due to stringent loan screening.

For self-employed individuals, the threshold for unsecured loans remains higher compared to salaried workers. Small-scale self-employed entrepreneurs who started businesses without work experience find it virtually impossible to obtain unsecured loans. In the secondary financial sector, it is practically impossible to get a loan without collateral or based on the credit of the self-employed. Internet-only banks also impose stricter loan conditions compared to salaried workers, such as setting an annual loan limit of 20 million KRW only for self-employed individuals with monthly sales exceeding 10 million KRW.

For these reasons, credit card companies, which hold the majority of self-employed individuals as merchant members, have recently been actively entering the credit evaluation business (CB) targeting the self-employed. This emerging promising business is expected to contribute to lowering loan interest rates for the self-employed. This is because it allows for a more precise estimation of the self-employed's credit scores. From the perspective of strengthening financial support for vulnerable groups, this business aligns with the government's inclusive finance policy direction. Moreover, from the card companies' standpoint, this business can prepare for the decrease in loan demand due to the planned reduction of the maximum interest rate scheduled for July this year. In other words, the CB business targeting the self-employed is also effective in maintaining profitability in the lending business.

The preparation conditions for credit card companies to enter the CB business targeting the self-employed are also positive. Many card companies have already obtained licenses for the MyData business, which enables the provision of data-based financial services. Additionally, card companies possess non-financial information such as transaction data of tens of millions of consumers, merchant sales data, telecommunications fees, and various utility bills. They also have sufficient big data-based data analysis capabilities. Furthermore, some card companies have been providing CB services for individual business owners using card information through regulatory sandboxes since last year. Some card companies are even capable of forecasting the potential temporary closure or business shutdown of self-employed individuals. This is possible because they have secured machine learning techniques that analyze merchant card sales data, commercial district competitiveness, goodwill, and rent levels to make predictions.

In conclusion, the entry of credit card companies into the CB business targeting the self-employed will serve as a turning point to shift policy finance and collateral-centered business credit evaluation to private finance and business value-centered credit evaluation. In the United States, the business value-centered loan called the 'SBA Loan' accounts for about 20% of the total loans of small banks, indicating its large scale. Active government support, such as granting licenses for fostering specialized CB businesses, is necessary to facilitate credit card companies' entry into the CB business targeting the self-employed.

Professor Seo Ji-yong, Department of Business Administration, Sangmyung University