"Active Consideration of Funding for Loan Companies"... Changed Commercial Banks

Loan Companies, The Last Legal Financial Market for Low Credit Borrowers

Loan Companies Facing High Interest Rates Shut Down Lending

Financial Authorities and Commercial Banks Consider Funding Loan Companies

Commercial banks are actively considering providing funding to excellent loan companies starting next year. During the recent period of rising interest rates since last year, loan companies have either stopped issuing new loans or significantly reduced them due to the legal maximum interest rate cap of 20%. Loan companies serve as a legal financial market that low-credit citizens can use as a last resort. Ultimately, low-credit borrowers who can no longer borrow from here are forced into illegal private lending. Financial authorities have requested commercial banks to cooperate in providing loan funds to loan companies to resolve this issue.

Loan companies mainly secure loan funds at an annual interest rate of 9-10% through savings banks or credit specialized companies. A representative from the loan industry explained, "The funding interest rate is already high, and when you add loan loss write-offs due to a delinquency rate reaching 10%, loan agent commissions, and operating expenses, there is nothing left even at a 20% interest rate. When the base interest rate soared like last year, the funding cost increased further, but the maximum interest rate remained the same, so the only options for loan companies were to stop lending or close down."

If loan companies can secure funds at low interest rates from commercial banks in the future, they will be able to lower loan interest rates for low-credit borrowers. This will also have the effect of preventing low-credit borrowers from resorting to illegal private loans.

"Loan Company Funding is a Win-Win for Low-Credit Borrowers" Banking Sector Responds Positively

A commercial bank official said on the 13th, "There is a positive atmosphere in the banking sector to support low-credit borrowers by providing funding to excellent loan companies," adding, "We are reviewing the scale and timing of loans to excellent loan companies." In 2018, KDB Capital, a subsidiary of the Korea Development Bank, and IBK Capital, a subsidiary of Industrial Bank of Korea, lent funds to excellent loan companies. Kookmin Bank, Woori Bank, and Hana Bank also provided loans worth several billion won each to some excellent loan companies.

However, since there was almost no margin and some former lawmakers framed it as "banks lending money to loan companies," the practice was discontinued. A financial authority official said, "The atmosphere among banks has changed now in terms of win-win finance." A consensus has formed among loan companies, financial authorities, commercial banks, and the National Assembly that "low-credit borrowers should not be pushed into the illegal private loan market," leading to a shift in the trend.

On the 6th, at the Financial Services Commission and Financial Supervisory Service insurance industry CEO meeting held at the Government Seoul Office in Jongno-gu, Seoul, Kim Ju-hyun, Chairman of the Financial Services Commission (right), and Lee Bok-hyun, Governor of the Financial Supervisory Service, are entering the meeting room. The meeting was held privately. Photo by Jo Yong-jun jun21@

Financial Authorities: "19 Excellent Loan Companies to be Announced Soon"

Financial authorities are establishing a systemic foundation through the "Excellent Loan Company System for Low-Income Finance." The core is to expand the supply of low-income finance by allowing Financial Services Commission-registered loan companies that meet the loan requirements for low-credit borrowers in the bottom 10% credit score bracket to borrow funds from commercial banks.

A loan company can be selected as an excellent loan company if the outstanding balance of low-credit borrower credit loans is 10 billion KRW or more, or if the proportion of low-credit borrower loans is 70% or higher. However, the company must not have been fined or suspended from business for violating financial laws in the past three years. The excellent loan company status can be maintained if the low-credit borrower credit loan balance meets the balance requirement (80% of the previous half-year balance, 90% at selection) or the ratio requirement (the company's low-credit individual credit loan balance is 60% or more of the total loan balance).

If the maintenance requirements for excellent loan companies are not met consecutively twice, the selection will be canceled. According to the recent Financial Supervisory Service review, among the 25 excellent loan companies, the majority (18 companies) maintained credit supply to the low-credit segment and fulfilled their roles. However, some companies (7 companies) are scheduled for cancellation due to failing to meet the maintenance requirements twice consecutively because of reduced credit supply to the low-credit segment. One company that met the selection criteria will be newly selected. Financial authorities stated, "The excellent loan companies based on the second half of this year's review results will be announced as 19 companies."

This allows commercial banks to easily identify excellent loan companies with high credit supply performance to low-credit borrowers and reflect this information in loan screening. Excellent loan companies can enhance their reputation based on performance and increase loans to low-credit borrowers. A financial authority official said, "We plan to form a consultative body involving commercial banks, savings banks, credit specialized companies that supply loan funds, and the loan industry."