[Ark of the Lowest Credit Borrowers] ① "Going to Gangnam for Loans for Ordinary People"... 'Haetsallon' Reservations Are Extremely Difficult

Lowest Credit Borrowers Unable to Get Loans Even from Secondary Financial Institutions
Massive Increase in Loans as They Flock to Policy Finance like Haetsalron

Due to Small Livelihood Loans, Even Booking Haetsalron Is Difficult
Wealthy Neighborhoods Have Booking Availability, Leading to Expeditions to Gangnam

On the 23rd, an information notice about a small emergency living expense loan product, which allows applicants to receive up to 1 million won on the same day at the Jungang Community Financial Integrated Support Center in Jung-gu, Seoul, was posted. Photo by Jinhyung Kang aymsdream@

"There are so many reservations for small livelihood loan consultations that it's hard to even book a spot for a consultation on 햇살론15. When I called the Korea Inclusive Finance Agency, they said reservations are more available in wealthier neighborhoods, so I'm thinking of going down to Gangnam. I have urgent bills to cover, and I need about 7 million won to put out the fire immediately. I'm really anxious." (A company employee in their 30s living in Nowon-gu, Seoul)

Lowest-credit borrowers trying to avoid falling into the private loan market are all boarding the government-created 'ark.' On the first day of advance reservations for small livelihood loans, which lend up to 1 million won per person, 6,200 people rushed in, and that's not all. Demand for 햇살론15, which lends money to lowest-credit borrowers in the bottom 20% credit score bracket to prevent them from entering the private loan market, is also surging. These are representative cases showing that the financial situation of lowest-credit borrowers is worsening due to economic slowdown and rising interest rates.

햇살론15 Loan Amount Surges from 190 Billion Won to 650 Billion Won

According to the scale of 햇살론15 loans submitted by Kim Sung-joo, a member of the Democratic Party of Korea, from the Korea Inclusive Finance Agency on the 7th, the new loan amount for 햇살론15 in the fourth quarter of last year was 652.1 billion won. This is a 240% increase compared to 191.5 billion won in the first quarter of last year. There was little movement in the second quarter (190.1 billion won), but it suddenly started to rise from the third quarter (396.7 billion won) and then rose sharply again at the end of the year. The total loan amount for last year alone reached 1.4304 trillion won.

Why did lowest-credit borrowers flock to these inclusive finance products? Since the second half of last year, interest rates have risen significantly, making it difficult for low-income and low-credit groups to get loans from financial institutions. According to the Financial Supervisory Service, the increase in loan interest rates at the five major banks last year was much higher than during previous interest rate hike periods. The increase in interest rates on new loans was 2.79 percentage points, which is 105% of the base rate hike of 2.75%. Considering that the average during the three previous base rate hike periods since 2000 was 54.5%, this time it was nearly twice as high.

As loan interest rates soared, low-credit borrowers' situations worsened due to existing loan delinquencies. The Bank of Korea reported that the delinquency rates for household loans at savings banks and specialized credit finance companies, which are mainly used by low-credit individuals, were 4.7% and 2.4%, respectively, as of the fourth quarter of last year. A Bank of Korea official said, "The delinquency rates in the secondary financial sector are higher than banks (0.2%) and are expected to rise rapidly in the future." Additionally, with the legal maximum interest rate capped at 20%, lowest-credit borrowers have no choice but to turn to the private loan market, which has led to a significant increase in demand for policy finance.

Borrowing from the government does not mean everyone repays. The rate of repayment by taxes on behalf of borrowers who fail to repay is also high. If borrowers fail to repay on time, the Korea Inclusive Finance Agency makes substitute payments to banks according to the guarantee ratio. The substitute payment amount compared to the cumulative guarantee supply of 햇살론15 averaged 16% last year, a noticeable increase from 11% previously.

햇살론15 is named after its loan interest rate of 15.9%. The Korea Inclusive Finance Agency classifies 햇살론15 along with small livelihood loans as 'high-interest alternative loans.' The interest rate for small livelihood loans is also 15.9%. Some criticize this rate as being at the level of private loan sharks. However, the financial authorities' position, which must bear the risk and lend money using taxes or donations to lowest-credit borrowers, is different.

Yoo Jae-hoon, Director of the Financial Consumer Bureau at the Financial Services Commission, explained, "The estimated average interest rate by the Korea Credit Finance Association is 414%. The 15.9% interest rate for inclusive finance is to prevent borrowers from turning to private lenders, and setting this rate is a way to confirm the borrowers' willingness to repay." For example, if a borrower takes out an initial 500,000 won small livelihood loan, the monthly payment is about 6,416 won. If repaid monthly, it decreases to 3,916 won after six months. 햇살론15 also reduces the loan interest rate by 3 percentage points annually for a 3-year term and by 1.5 percentage points annually for a 5-year term if the principal and interest are repaid well.

햇살론15 and small livelihood loans, the 'ark for lowest-credit borrowers,' are funded temporarily based on available resources. Therefore, the substitute payment rate must remain at a manageable level to continue supply. Otherwise, even policy finance products will start to consider creditworthiness, making it difficult to absorb people who cannot borrow from the secondary financial sector at the current scale.

Lawmaker Kim Sung-joo said, "As the supply of 햇살론15 loans increases significantly, the amount of substitute payments is also likely to increase accordingly. It is important to strengthen incentives for borrowers who repay faithfully to make the policy finance system sustainable."