With the combination of economic recession and sluggish domestic demand, the arrears rate for policy financial products for vulnerable borrowers soared to the highest level, reaching twice the level of last year. The arrears rate for the 'Sunshine Loan 15', a policy financial product supporting the lowest credit borrowers, exceeded 25% at the end of last month, marking the highest ever. Financial authorities are considering measures to overhaul the entire policy microfinance system.
According to data received from the Korea Financial Services Agency by Lee Kang-il, a member of the National Assembly's Political Affairs Committee, the substitution repayment rate of the Sunshine Loan Bank, which supports low-income and low-credit individuals who have relatively good repayment ability to transition to the primary financial sector, was recorded at 16.2% as of the end of November. This is a dramatic increase from 8.4% at the end of last year, doubling in just one year.
The substitution repayment rate refers to the ratio of the amount paid by policy institutions, such as the Korea Financial Services Agency, to banks when a borrower fails to repay the principal. Analysis suggests that even individuals with repayment ability are unable to repay their debts due to a rapid deterioration in funding conditions this year.
The arrears rates for policy products targeting even more vulnerable borrowers have soared to unprecedented levels. The arrears rate for the 'Sunshine Loan 15' reached 25.5% at the end of last month. The substitution repayment rate for Sunshine Loan 15 was only 5.5% in 2020, but it has steadily risen, reaching 14.0% in 2021, 15.5% in 2022, and 21.3% in 2023.
The substitution repayment rate for the lowest credit guarantee for borrowers in the bottom 10% of credit scores, who are denied loans during the Sunshine Loan 15 credit screening, also rose by 12.1 percentage points from 14.5% at the end of last year to 26.6% as of November. The arrears rate for the small living expenses loans, which provide up to 1 million won (annual interest rate of 15.9%) to vulnerable groups in urgent need of cash, recorded 31.0% at the end of last month, crossing the 30% line for the first time.
As the substitution repayment rates have increased, next year's budget for microfinance has been significantly reduced. The supply target for the lowest credit guarantee has decreased from 280 billion won this year to 170 billion won next year due to an increase in the business loss rate from 20% to 33%.
The supply target for the Sunshine Loan 15 was set at 1.05 trillion won this year using government funds and resources from the National Happiness Fund. However, due to a temporary depletion of resources from the National Happiness Fund, it is expected to be reduced by 40% to 650 billion won next year.
In response, the Financial Services Commission is preparing to restructure policy financial products such as Sunshine Loans and small living expenses loans. The rapid increase in the arrears rate necessitates management, and it is believed that some adjustments to the criteria for policy product recipients are also required. The Financial Services Commission is also examining private microfinance support systems, including mid-interest loans offered by savings banks and internet-only banks.
Lee Kang-il noted, "We must strengthen the microfinance safety net, including the reform of the Sunshine Loan," adding that "the government and National Assembly should work together to address the suffering of marginalized financial groups."