Will Easing Interest Burdens for Low-Credit Borrowers Become Reality? "Fiscal Responsibility Must Be Strengthened or Support Criteria Specified"

KIF Report: "Case Studies and Implications of Overseas Financial Support for Low-Income Groups"
Australia and Japan Operate Interest-Free Loan Programs
Annual Supply Scales: Approximately 6 Billion Won and 400 Million Won, Respectively
Korea Supp

In the ongoing debate over the appropriateness of interest rates for loan products supplied to low-income individuals as a matter of policy, some have pointed out that strengthening fiscal responsibility and specifying support categories are necessary to lower interest rates. The controversy over the appropriateness of policy-based microfinance interest rates emerged in September, when President Lee Jaemyung called for measures to raise loan rates for high-credit borrowers and lower the rates for low-credit borrowers, whose interest rates are currently in the 15% range.

According to financial authorities on November 3, the Financial Services Commission is currently reviewing ways to lower the interest rates on policy-based loan products supplied to low-credit and low-income individuals. The main policy-based loan products currently available for low-credit and low-income individuals include ▲Illegal Private Lending Prevention Loan and ▲Special Guarantee for Lowest Credit Borrowers .

The Illegal Private Lending Prevention Loan (formerly Small Emergency Living Expenses Loan) is a policy-based financial product designed for vulnerable groups with low credit and low income, who are not only excluded from institutional finance but also struggle to access existing policy microfinance support, leaving them exposed to illegal private lending.

Individuals in the bottom 20% of credit scores, with annual incomes of 35 million won or less, can borrow up to 1 million won. The loan is available at an annual interest rate of 15.9% for one year.

The Special Guarantee for Lowest Credit Borrowers is a guaranteed policy microfinance product that supports individuals who have been denied access to "Sunshine Loan 15" due to reasons such as past delinquencies. Individuals in the bottom 10% of credit scores, with annual incomes of 45 million won or less, can borrow up to 10 million won at an annual interest rate of 15.9% for three or five years.

Unlike Korea, major countries such as Australia and Japan operate policy-based microfinance products for low-income groups at lower interest rates than private financial institutions, or even at zero interest.Since 2003, Australia has offered "No Interest Loan Scheme (NILs)" through a partnership between National Australia Bank (NAB) and the nonprofit charity GSANZ, targeting low-income groups who are unable to use private financial institutions.

In Japan, each prefectural social welfare council provides "Living Welfare Fund Loans" at low interest rates to low-income, disabled, and elderly households. If a guarantor is provided, borrowers can benefit from zero interest.

The reason President Lee has focused on "interest rates" rather than loan volume is that, compared to major countries, the scale of Korea’s policy-based microfinance is overwhelmingly large.

The annual supply of policy-based microfinance products in Korea is about 10 trillion won, which is similar to the annual budget of Daegu City (10.9 trillion won).

In contrast, the annual supply of such products in Australia (NILs) and Japan (Living Welfare Fund Loans) is only 64.1 million Australian dollars (about 5.97 billion won) and 4 million yen (about 370 million won, based on Tokyo), respectively.

Especially in Australia, small loans are provided to low-income individuals for essential living expenses such as purchasing home appliances, vehicle repairs and registration fees, medical expenses, communication costs, and home repair costs due to natural disasters.

There are also opinions that policy-based microfinance should be harmonized with the private financial market. Lee Sujin, Senior Research Fellow at the Korea Institute of Finance, stated, "If the interest rate subsidy effect of policy-based microfinance products is excessive, private financial institutions may lose their interest rate competitiveness and reduce the supply of credit loans," adding, "This could ultimately increase the number of people who lose access to loans."

Lee also pointed out, "The eligibility criteria for policy-based microfinance products in Korea are quantified based on income and credit score," and "Unlike Australia and Japan, where policy support helps meet temporary and urgent funding needs, Korea’s policy support tends to be limited to temporary living expenses." She emphasized, "Like Australia and Japan, it is necessary to specify support categories, strengthen documentation requirements, and restrict the use of funds by paying necessary funds directly to vendors."