[Exclusive] Daewi Repayment Rate '14%' Hassalron, Credit Evaluation Model to Change

National Happiness Fund Begins CSS Improvement Work for Saessalron15
First Meeting Held This Month for Service Contract Ordering
Seogeumwon Emphasizes 'Soundness' in Mid- to Long-Term Financial Management Plan

Illustration by Youngwoo Lee 20wo@

[Asia Economy Reporter Song Seung-seop] The Korea Inclusive Finance Agency and its subsidiary, the National Happiness Fund, have begun work to change the credit scoring system (CSS) for the inclusive finance product, Saessalron15. As concerns over defaults among financially vulnerable groups have increased due to the prolonged COVID-19 pandemic and the Saessalron default guarantee rate has soared, it is expected that efforts to strengthen soundness will be undertaken.

According to the financial sector on the 21st, the National Happiness Fund started the Saessalron15 CSS improvement project this month. The National Happiness Fund is a subsidiary of the Korea Inclusive Finance Agency and is responsible for Saessalron-related tasks. The fund plans to commission a service project to review the direction and implementation of the CSS improvement. Recently, the staff in charge held their first meeting, which was more of a courtesy meeting.

Saessalron15 is a representative policy loan product for low-credit and low-income individuals. It requires only minimal screening and offers loans up to 14 million KRW at an interest rate of 15.9%. The criteria are an annual income of 35 million KRW or less, or 45 million KRW or less with a credit score in the bottom 20%. Originally launched as Saessalron17, it was reorganized into the current Saessalron15 after the legal maximum interest rate was lowered from 24% to 20%.

According to key stakeholders, the purpose of this work is to update the Saessalron15 CSS to reflect the current financial environment. The CSS currently applied to Saessalron15 was created when Saessalron17 was first launched in 2019.

Rising Saessalron Default Guarantee Rate... How Will the CSS Change?

The CSS improvement is expected to consider the prolonged COVID-19 pandemic and the increased risk of defaults. Since April 2020, the government has extended principal maturities and deferred interest payments for self-employed and small business owners. These loans are classified as normal, making it difficult to assess default status. Household credit balances have increased by 7.8% in one year to 1,862.1 trillion KRW, and with the rise of multiple debtors mainly in the secondary financial sector, the quality of debt is deteriorating.

The risk of default for Saessalron is also increasing. According to data submitted by the Korea Inclusive Finance Agency to Rep. Yoon Chang-hyun of the People Power Party, the default guarantee rate for Saessalron15 (17) last year was 14%. The default guarantee rate refers to the proportion of money the government repays on behalf of borrowers who fail to repay. This rate surged 2.5 times from 5.5% a year earlier. The default guarantee rate for Saessalron Youth, launched targeting young people, also rose from 0.2% to 2.9%.

Accordingly, it is anticipated that the Saessalron CSS improvement work will focus on enhancing soundness. The Korea Inclusive Finance Agency set ‘resource expansion’ and ‘asset soundness management’ as basic directions while establishing a mid- to long-term financial management plan in the third quarter. Financial stability, active management of default rates, and stable operation of financial assets were cited as goals. In this case, the loan threshold for financial consumers may rise, so the key is to secure soundness while minimizing side effects.

Conversely, to strengthen inclusive finance, limits and interest rate benefits could be enhanced. However, since the target is vulnerable groups, there is a downside of higher default rates and lower recovery rates. A Korea Inclusive Finance Agency official said, "The direction of CSS improvement and the actual application timing are still undecided," adding, "It is expected to be completed within this year."