Credit Score Bottom-Ranked Individuals Downgraded Below Bottom 20% Credit Grade... New Qualitative Review Clause Established
Interest Rate Adjustments Only for Loans with Over 9% High Interest Rates for Borrowers Delinquent Less Than 30 Days
[Asia Economy Reporter Eunju Lee] The Financial Services Commission (FSC) has taken a step back amid concerns from the secondary financial sector regarding the New Start Fund. The FSC has partially accepted worries that most of the non-delinquent low-credit borrowers, who are key customers of the sector, could have their debts transferred to the New Start Fund. The core of the matter is strengthening the criteria for low-credit borrowers eligible for interest reduction and conducting qualitative assessments of borrowers to reduce the number of beneficiaries.
According to the financial sector on the 8th, the FSC recently notified a partial revision of the detailed criteria for determining the ‘low credit score borrowers’ among the ‘borrowers at risk of default’ subject to interest adjustment under the New Start Fund. Previously, during practical consultations with the secondary financial sector, the FSC had proposed the ‘bottom 20%’ of credit scores as one of the criteria for borrowers at risk of default. This raised concerns that most borrowers using the secondary financial sector could be included as beneficiaries of interest reduction. A secondary financial sector official pointed out, “The bottom 20% corresponds to a credit score range of about 724 to 740, which would include almost all ‘self-employed’ borrowers who use the secondary financial sector.” The FSC defines borrowers at risk of default as those with low credit scores, those who have closed their businesses, borrowers who find it difficult to extend maturity, and those registered for credit information management due to tax delinquency.
The FSC explained that it narrowed the scope of policy beneficiaries eligible for interest adjustment solely due to low credit by reflecting concerns from the secondary financial sector. The FSC lowered the detailed criteria for low credit score borrowers from the bottom 20% and introduced a qualitative assessment clause. Among low credit score borrowers, Korea Asset Management Corporation (KAMCO), the operator of the New Start Fund, will conduct qualitative assessments to directly determine whether there is a risk of moral hazard and decide on interest reduction accordingly. This is expected to include qualitative assessments for borrowers at risk of long-term delinquency. In other words, the range of borrowers eligible for interest reduction benefits solely based on low credit scores has been reduced.
An FSC official explained, “We have prepared additional supplementary measures reflecting concerns that most users of the secondary financial sector are low credit score borrowers.” Additionally, for borrowers with delinquency under 30 days, a provision was added to adjust interest rates only for high interest rates exceeding 9%. The official added, “There are customers in the savings bank sector who were paying high interest rates above 9%, and for borrowers who took loans exceeding 9%, we have prepared detailed supplementary measures to adjust the interest rate only up to 9%. Of course, interest rates for customers who borrowed at lower rates will remain unchanged.” This reflects the acceptance of concerns from the secondary financial sector by limiting the scope of interest rate adjustments.
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